Armstrong Economics: The Coming Great Depression. Why Government Is Powerless

Armstrong Economics:
The Coming Great Depression.
Why Government Is Powerless

It is frustrating to read so many comparisons of our current situation with 1929 while watching policy be set-in-motion to create spending on infrastructure. Everyone has their hand out looking for a bailout like a bunch of street burns pleading for money so they can get drunk or stay drunk. Almost nothing of what I have read is close to being accurate. The scary part is depressions are inevitably caused by politicians who may be paving the road with good intentions, but are relying upon analysis so biased, we do not stand a chance.

The stock market by no means predicts the economy. A stock market crash does not cause a Depression. The Crash of 1903 was properly titled “The Rich Man’s Panic.” What has always distinguished a recession from a Depression is the stock market drop may signal a recession, but the collapse in debt signals a Depression. This Depression was set in motion by (1) excessive leverage by the banks once more, but (2) the lifting of usury laws back in 1980 to fight inflation that opened the door to the highest consumer interest rates in thousands of years and shifted

spending that created jobs into the banks as interest on things like credit cards. As a percent of GDP, household debt doubled since 1980 making the banks rich and now the clear and present danger to our economic survival. A greater proportion of spending by the consumer that use to go to savings and creating jobs, goes to interest and that has undermined the ability to avoid a major economic melt-down.

The crisis in banking has distinguished depression from recession. The very term “Black Friday” comes from the Panic of 1869 when the mob was dragging bankers out of their offices and hanging them in New York. They had to send in troops to stop the riot. A banking collapse destroys the capital formation of a nation and that is what creates the Depression. The stock market is not the problem despite the fact it is visible and measurable and may decline 40%, 60% or even 89% like in 1929-32. But the stock market decline is normally measured in months (30-37) whereas the economic decline is measured in years (23-26). Beware of schizophrenic analysis that is often mutually contradictory or often antagonistic in part or in quality for far too often people think they have to offer a reason for every daily movement.

Our fate will not be determined by the stock market performance. Neither can we stimulate the economy by increasing spending on
infrastructure any more than buying your wife a mink coat, will improve the grades of your child in school. We are facing a Depression that will last 23-26 years. The response of government is going to seal our fate because they cannot learn from the past and will make the same mistakes that every politician has made before them. Even if the Dow Industrials make new highs next week (impossible), the Depression is unstoppable with current models and tools.

Stocks & Consumers vs. Investment Banks
Let us set the record straight. The Stock Market is a mere reflection of the economy like looking at yourself in a mirror. It is not the economy and does not even provide a reliable forecasting tool of what is to come economically. We are headed into the debt tsunami that is of historical proportions unheard-of in history. There have been the big debt crisis incidents that have hobbled nations, toppled kings, and set in motion economic dark ages. It is so critical to understand the difference between the economy and the stock market, for unless you comprehend this basic and root distinction between the two, survival may be impossible.

To the left I have provided the Economic Confidence Model for the immediate decline. You will notice I did not call this the “stock market
model” nor a model for gold, oil, or commodities. I used the word “economic” with distinct and clear purpose. I have stressed it does not forecast the fate, of a particular market or even a particular economy. It is the global economic cycle some may call even a business cycle. Please note that what does line-up and peaks precisely with this model often even to the specific day that was calculated decades advance is the area of primary focus. Yet the US stock market reached a high precisely with this model and then rallied to a new high price 8.6 months later. In Japan, the NIKKEI 225 peaked precisely on February 26th, 2007. This is not a very good omen. But there was something profound that turned down with the February 27th, 2007 target – the S&P Case-Shiller index of housing prices in 20 cities. February 2007 was the peak for this cycle in the debt markets – not the US stock market.

The stock market always bottoms in advance of the economic low. In fact, we will see new highs in the now even in the middle of a Great Depression. At least the 1929 cycle was more of a bubble top in stocks than what we have in place currently in the US stock market. We still had the bubble top in the NASDAQ back in 2000, but this illustrates the point. There was a major explosive speculative boom. The bubble burst in 2000 and there was a moderate investment recession into 2002, but there was no appreciable economic
decline that was set in motion because of that crash.

Currently, we have a major high in 2007, but it was not a bubble top because it was not the focus of speculation. The real concentration of capital that created the bubble top, took place in the debt markets. This is the origin of the economic depression – not stocks and not the displacement of farmers because of a 7 year drought created by the Dust Bowl that invoked the response of the Works Progress Administration (WPA) in 1935. Keep in mind the stock market bottomed in the mid summer of 1932 when unemployment was not excessive from a historical perspective. The 25% level of unemployment came after the major 1932 stock market low that was followed by both the banking crisis after the election of FDR and before his fateful inauguration. The Banking Crisis came about because of rumors that Roosevelt was going to confiscate gold. Herbert Hoover published his memoirs showing letters written to Roosevelt pleading with him to make a statement that the rumors were false. He did not.

It’s the Debt Level Stupid

In 1907, the excessive debt was in the stock market. Call Money Rates (the level of interest paid to support broker loans) reached 125%. Even 1929 never came close to such levels. This also illustrates that the capital markets do not have enough money to invest equally on all levels in all segments of a domestic economy or in particular nations. To create the boom-bust, it requires the concentration of capital. A bubble top is formed when the majority of those seeking to employ money to make money are focused in a particular market or even country. The 1907 Crash was a bubble top because capital invested on a highly concentrated basis in railroad stocks. The bubble top in Japan back in 1989 was caused by a concentration of both domestic and international capital that had made Japan the number one market in the World. It is this concentration of capital that creates the boom and bust cycle. If money was evenly disbursed like the socialistic & communistic philosophies argue, we would be back to the dark ages where there was no concentration of capital and no economy beyond the walls of the castle so to speak. That is why communism failed.

It is the overall level of debt that has reached a bubble top in almost every possible area. For example, in 1980, household debt was about 50% of GDP. Going into the February 2007 high, it reached about 100% of GDP. We must also realize that something profound took place back in 1980. Americans would on the first blush seem to be living it up, buying everything they can on credit and have piles of tangible assets to show for it. That is like looking at the statistics for carrots and arguing that they are lethal because every person

who has ever eaten a carrot is dead or in the process of a gradual slow death. This absurd example illustrates the bias that can produce the schizophrenic analysis.

There were, once upon a time, usury laws that generally held any interest rate greater than 10% was illegal. The Federal Reserve under Paul Volker believed that interest rates needed to be raised to insane levels to stop the runaway inflation, which was the first stone that hit the water sending the shock waves that we are having to pay for today. Once the usury laws were altered so the Fed could fight inflation, it set in motion the doubling of household debt, not to mention the national debt. At 8%, the principle is doubled through interest in less than 10 years. The national debt exploded from $1 to about $10 trillion in 25 years and household debt has doubled. Some states now consider usury to be 26%. Historically, these are the interest rates paid by the very worst of all debtors – the bankrupts. In fact, in China, the worst creditors historically paid at best 10%. What we have done is the lifting of usury to fight inflation back in 1980, has resulted in usury now being so high, a larger portion of income of the common worker is spent on interest, not buying goods & services that even create jobs. This is one primary reason why jobs have been leaving as well. The consumer needs the lowest possible price and labor wants the highest wages, and to stay competitive, producers leave taking manufacturing jobs as well as service jobs. The extraordinary rise in interest rates that are historical highs since at least pre-Roman times, could not have been possible but for the lifting of usury laws back in 1980 to fight inflation. This amounted to setting a fire to try to stop a brush fire that failed. Consumers pay the highest rates in thousands of years that feed the banks at the expense of economic growth. Even the National Debt rose from $2. 1 to $8.5 trillion between 1 986 and 2006 with $6. 1 trillion being interest. We are funding the nation on a credit card and destroying the economy simultaneously.

This has been enhanced by the tremendous leverage and false position that were created in the derivative markets causing the banks to just implode. Indeed, this is the origin of the economic Depression we are facing. The $700 billion bailout might have worked if Paulson did what he said he would – buy the debt and take it out of the banks. Had the debt been segregated into a pool and managed independently by a hedge fund manager not an investment banker, we could have mitigated the problem. But that is now too late. The credit implosion is taking place on a wholesale basis around the world. The more the economy declines in housing prices, the greater the defaults, the greater the foreclosures, and the lower the economy will move. We are now in a downward spiral that cannot be fixed by indirect schemes. As I said, you cannot get your kid’s test scores up by purchasing a mink coat for your wife. Everyone will have their hand out begging for infrastructure money. But the theory of just spending money that will somehow make things better, it is like handing Mexico a trillion dollars and arguing that they will buy US goods that will somehow reverse the economy.

The leveraging of debt by the Investment Banks in particular has undermined the global economy. Where household debt has doubled since 1980, the professional financial service sector has seen a rise from 21% of GDP in 1980 to 116% by February 2007. Now consider the debt that they created with the mortgages is already down by 50% and falling, the bailouts will keep coming. To help correct the problem, the commercial banks will tighten credit to make their exposure less, and in fact, their solvency ratios will require it anyway. This we can expect to see not just in business, but housing and car loans that will contract the economy as well.

The Great Depression is not the perfect model for today. It was a complete capital contraction. The stock market basis the now Dow Jones Industrials fell 89% between September 3rd, 1929 and July 1932. The contraction in debt was quite massive. Then too, the leverage in banks collapsed that reduces the velocity of money and therefore the money supply. The banks were the first real widespread failures with 608 in 1930. Between February and August 1931, the commercial banks began to bleed profusely as bank deposits fell almost $3 billion or about 9% of all deposits. As 1932 began, the number of bank failures reached 1,860. The massive amount of bank failures in the thousands took place with the rumor of Roosevelt’s intention to confiscate gold. Although he denied that was his policy the night of the elections, he remained silent refusing to discuss the issue until he was sworn in. on March 6, 1933 just 2 days after taking office, Roosevelt called a bank “holiday” closing the banks from which at least another 2,500 never reopened.

All of these events are contrasted by the collapse in national debts in Europe. Other than Herbert Hoover’s memoirs, I have yet to read any analysis of the Great Depression attribute anything internationally other than the infamous US Smoot-Hawley Act setting in motion the age of protectionism in June 1930. It was the financial war between European nations attacking each other’s bond markets openly shorting them that led to all of Europe defaulting on their debt. Even Britain went into a moratorium suspending debt payments. This is what put the pressure on capital flows sending waves of capital to the United States that to sane degree was kind of like the capital flow to Japan into 1989. This put tremendous pressure upon the dollar driving it to new record highs that were misread by the politicians who did not understand capital flow. They responded with Smoot-Hawley misreading the entire set of facts. (see Greatest Bull Market In History) (Herbert Hoover’s memoirs).

It is true that today we have Keynesian and Monetarist theories to manage the crisis. Sad to say, neither one will now work. Bernanke has responded in force dropping the federal funds rate from 5.25% to .25%. He has also opened the Fed Window and thrown out more than $1 trillion in 13 months. However, as admirable as this may be, he has no tool that will do the job. Milton Friedman was correct! The Great Depression was not caused by the decline in the stock market. The event was set in motion by the credit and banking crisis that resulted in a one-third contraction in the money supply.
Interest rates will do nothing. The flight to quality always takes place so what happens is a two-fold punch. (1) Interest rates collapse because capital seeks preservation not yield and will accept during such times virtually a zero rate of return, and (2) the flight to quality takes more available cash from the private sector because government debt truly does compete with the private sector. We are seeing this even now. Federal debt becomes the place to go so we see higher yields in both state am municipal bonds because they are not quality and could default like any bank. This contracts the money supply. Opening the window and just throwing buckets of money into the system will never have any impact to reverse the trend.

Furthermore, we are now in a Floating-Exchange Rate system that has made the global economy far more complex than it was in 1929. We all know that China is one of the biggest holders of US government debt. With the contagion spreading to Russia, South America, and China aside from Europe, we see a steeper decline in the China stock market than we do in the United States because that is where capital had concentrated domestically. If China needs money to stimulate its own economy when exports appear to be collapsing by about 50%, then we can see that the Keynesian model is worthless. If the Fed tries to pump money into the system through buying bonds from the private sector, those bonds may be held by aliens who take the money back to their own economies. The Fed cannot be sure it is even capable of stimulating the purely domestic economy. Lower interest rates to virtually zero like Japan did during the 19905, then if capital finds a better place to invest, it can leave for a higher rate of interest as capital did from Japan to the United states, which is why their domestic economy was never stimulated by the’ lowerinterest rates. Leverage during the Great Depression was not even remotely close to what we have to face today. The credit-default swaps are alone worth about $60 trillion. This was a stupid product for it has so tangled the world there may be no way out. This product created the false illusion that you did not have to worry about the quality of the loan because it was insured. We have no way of covering this level of implosion. Add the unfunded entitlements and then the state and local debts who cannot print money to cover their shortfall s, and we are looking at a contraction of debt that is simply beyond all contemplation.

So What Now?
So now that we see it is not Wall Street, again, but the banks, perhaps we can separate the facts from the fantasy. We can now see that there are two separate and distinct forecasts to be made – (1) economy and (2) stock market. Economic Depressions have a duration unfortunately of generally 23 years with an outside potential of 26 years. The 1873 Panic led to a economic depression of really 23 years into 1896. There were bouts with high volatility and injection of major waves of inflation following the major silver discoveries. It was the age of the Silver Democrats who tried to create inflation by over-valuing silver relative to gold. This created a wave of European-American arbitrage where silver flowed into the US exchanging it for gold, which then flowed back to Europe. By 1896, the US Treasury was broke.

The Panic of 1873 marked the collapse of J. Cook & Co, the huge investment bank that was the 19th Century version of Goldman Sachs. They went bust because of excessive leverage in railroad stocks. It matters not what the instrument may be, it is always the leverage, which set the tone for a economic depression that lasted into 1896 where JP Morgan became famous for leading a bailout of the us Treasury organizing a loan of gold bullion. The stock market rallied and made new highs with plenty of panics between 1873 and 1896. The point is, The Panic of 1893 was quite a horrible one. The point is, the stock market is not a reflection of the economy. It often trades up in anticipation of better times, and trades down on those same perceptions of bad times. In both cases, new highs or lows unfold even contrary to economic trends.
We will see new highs in the now long before we see the final low in the economy. The ideal lows on a timing basis for the stock market will be as soon as April 2009 or by June of 2009. The more pronounced lows would be due on a timing basis between December 2009 and April 2010. The most extreme target would seem to be August 2010. The shorter the resolution to the stock market low, the sooner we will start to see much higher
volatility.

The low for the Dow would be indicated by reaching the 3,500-4,000 area. A 2008 closing below 12,000 in the cash now Jones Industrials will signal that the bear market is underway into at least 2009 if not 2010. A year-end closing for 2008 below the 9,700-9,800 level, will signal higher volatility as well. The real critical level for the closing of 2008 will be the 7,200 area generally. A year-end closing beneath this general level will signal that we could see the sharp decline to test the extremes support at 3,600-4,000 by as early as April 19th, 2009 going into May /June 2009. If we were to drop so quickly into those targets, this would be most likely the major low with a significant rally into at least April 16th, 2010.
The less volatile outcome would be a prolonged decline into the December 2009 target to about April 16th, 2010. A low at that late date would tend to project out for a high as early as June 2011 or into late 2012. Nevertheless, volatility appears to be very high. Those who were at the 1985 Economic conference in Princeton, may want to review those video tapes. The volatility we were looking at 20-30 years into the future is now. As 3 of the 5 major investment bankers failed, Merrill, Lehman and Bear, the liquidity has evaporated so the swings are going to be much more dramatic.

The major support is 3,600 on the now Industrials.

During ’09, the support area appears to be 6,600, 5,000, and 4,000-3,600. Clearly, resistance is shaping up at 9,700-9,800. It would take a monthly close back above the 12,400 level to signal new highs are likely. If we saw a complete collapse into a low by April 2009 or June 2009 reaching the 4,000 general area, this would be the major low with most likely a hyper-inflationary spiral developing thereafter. In that case, the now Jones Industrials could be back at even new highs as early as mid 2011 or going into late 2012.

Gold has decoupled from oil as it should and has been rising on an ounce-to-barrel ratio. Here, the pivot area for 2009 seems to be the $730-$760 area with the key support being still at the $525-$540 zone. The major high intraday was on March 17th, 2008. A weekly closing below $800 warns of consolidation. Only a monthly closing below the $535 area would signal a major high is in place. The more critical support appears to be at about $680 – $705. A weekly closing beneath this area will also warn of a potential consolidation. A major high is possible as early as 2010-2011 with the potential for an exponential rally into 2015 if there is any kind of a low going into 2011.45. The key to watch will be crude Oil. The collapse of Investment Banks has removed the speculation that exaggerated the trend. A year-end close below $40 for 2008 would signal a major high and serious economic decline ahead.

There Are No Tools Left! The Emperor Has No Clothes
It is hard to explain to someone who believe he has power, that he really has nothing of any significance. This becomes the story of the Emperor Has No Clothes. No one will tell him, and if you do, it may be off-with-your-head. This is akin to the man behind the curtain in the Wizard of OZ trying to keep up the whole illusion. After all, why do we vote for people unless we believe that will somehow change our lives?

Interest Rates
When an economy is rising and the stock market is exploding, interest rates always rise because the demand for money is rising because people believe that they can make a profit. Government pretend to be raising interest rates to stop inflation, but they do not create a trend contrary to the free markets. What happened in 1980 was merely that the government over-shoots the differential between expectations and the rate of interest. If you believe the stock market will double, you will pay 20% interest. A rising interest rate does not create a bear market. Only when the rate of interest exceeds expectations of potential profit offering almost a fixed secured return, will capital leave the speculative market and run to the bond market. In a bear market, interest rates always decline because of the flight to quality.

When there is a risk of a .banking crisis as well, then the flight to quality shows that capital is willing to accept virtually zero in return for the privilege to park itself is a secure manner to preserve the future.

In both cases, the government may accelerate the trend, but by no means can they create the trend or alter the trend. Lowering interest rates to zero right now will not reverse the economic decline. People will look out the window and until they feel confident again, they will not come out from behind the castle walls. Japan lowered interest rates to virtually zero for nearly a decade. All it did was fuel the carry trade whereby yen was borrowed at 0.1 % and invested in dollars at 5-8%. There was little opportunity to invest domestically in Japan and the stock market languished in a broad consolidation with flurries the upside every-now-and-again.

Monetary Theory
The Fed has already put into the system about $1 trillion in 13 months. The real problem is they are buying back US government debt injecting cash into the system. But if those bonds are sold to the Fed by foreign holders, there can be no injection of cash into the domestic economy. This amounts to the monetization of our debt in any event. Clearly, buying bonds from the market is not a guaranteed increase in domestic money supply especially when the velocity of money is itself collapsing. Borrowing heavily all these years and depending on foreign investors to buy that debt, altered the course of economics. Of course there has always been the foreign investor, but there has not been the floating exchange rate system. The rise and fall of the dollar itself can now either attract foreign capital with an advance or repel capital with its decline. Like we needed another new variable.

Infrastructure Spending
There really is nothing left in the tool bag that can help even to mitigate the coming Economic Depression. The unemployment rate at the end of 1930 was only about 8.9% – similar to the 1975 recession. Things were very slow back then. Even housing was not moving and people took whatever offers came their way. It was the Dust Bowl that began in 1934 that sent the unemployment rising after the 1932 low in the stock market. About 40% of the work force was agrarian. Hence, Congress could not pass a law to make it rain. The real devastation was that this presented a huge portion of the work force that had to be retrained into skilled labor. It was the Great Depression that finally by force of necessity, created an industrial work force that may have taken another 200 years to unfold by gradual transformation.

The WPA was formed in 1935, 3 years after the low in the stock market (1932). It had a slow and marginal success. At best, if we attribute all improvement to this one program, very unlikely, unemployment was only reduced by about 20%.

1935 20.3%
1936 16.9%
1937 14.3%
1938 19.0%
1939 17.2%
1940 14.6%

Even if we attribute everything to the WPA, all the way into 1940, the most the unemployment declines was by 30%. However, at the end of World War II, we see an Unemployment rate of 1.9% by 1945. Any ideas that we can spend trillions on infrastructure and make it all better, forget it.

Turning to infrastructure in the middle of a debt crisis makes no sense. The idea of just spending money will somehow stimulate the economy, will not work. This is like trying to fight in the desert of Iraq using the same tactics as in Vietnam. There has to be sane connection to what we are doing. Just because FDR instituted the WPA when we had a huge displacement issue in the work force, almost 6 years after the crash began, makes no sense at all for our current problems. As I said, this is like buying your wife a mink coat to somehow influence your kid to get their grades up. The connection is tenuous at best and nonexistent in all reality.

Summary
Unless we attack the debt structure directly, there is no point in counting upon any government to help mitigate the problem and more-likely-than-not, our very future may be recast in so many ways, the level of frustration will rise, and that leads to war because war distracts the people from hanging their own politicians. The oldest trick in the book is to blame the guy next-door down. Unless we are honestly prepared to truly

1) reorganize the structure of government,
2) reorganize the entire debt structure both private and public,
3) regulate leverage, 4) restore usury laws that will free up personal income,
and 5) look at just eliminating the federal income tax in combination with
6) establishing a new national heathcare system that will restructure all pension plans public and private, there is not much hope for the future from government.

Our definition of money (M1) does not include bonds so we can fool ourselves by issuing $10 trillion in bonds is different than printing the cash. It is still money. Taxes are needed in a gold standard where money cannot be created. Stop competing with the states, control the budget as a percent of GDP, increase the money supply to that degree, and stop the taxing when money is created by leverage and velocity anyway. This will restore jobs and inject huge confidence as in 1964 when the payroll tax was cut permanently. One-offs never work. People save the rebates for a rainy day. We need real honest reform since the states will go broke and seek handouts as well. So, it is time to get real. It is time we restructure the entire system including the banks which always cause the problem. We don’t need excessive regulation of things that did not create the problem when the real culprits always escape.

You may send comments directly to Martin Armstrong at ArmstrongEconomics@GMail.com.

The Collapse of Capitalism. Or is it Socialism? Dec 11, 2008

by Martin A. Armstrong – December 11th 2008
Publish at Scribd or explore others: Research economy martin armstrong

Armstrong Economics
The Collapse of Capitalism or is it Socialism?
What does this mean for Government?

There have been plenty of articles asking whether Capitalism is now dead. The problem is the question already presumes an outcome and fails to realize that we are still in the middle of the greatest Economic Transformation in the history of mankind. We are in fact not seeing the collapse of capitalism, but are in the final stage of the death of Socialism.
Governments will rail against the collapse of Socialism because it has been the source of their power � �vote for me and you get something for nothing.� We are in the final phase – a transition which is taking the form of a “tsunami of spending” to try to make it all better. What we must be concerned about will be who gets blamed when it fails?

Lifting this rock allows the scorpions to surface. It is more akin to opening Pandora’s Box and allowing a swarm of evils to escape and torment mankind. We have no choice but to speak very frankly, for unless we truly understand the nature of events, there is no way to close the box and make it all better. As Saint Jerome said of Rome: “When Rome fell, the Romans were still laughing.” They had no idea of what was taking place and just assumed Rome was impregnable. We can only stop an event if we recognize it is happening.

If we are afraid to ask the correct question, then perhaps we are too biased to comprehend what we have done and take responsibility for our own actions? To paraphrase Edward Gibbon in his memorable epitaph on Rome: We were the capitol of democracy, the citadel of the earth, the terror of tyrants, illustrated by the footsteps of so many triumphs, enriched by the leadership in economic freedom that was the beacon to so many nations. This spectacle, how is it fallen?

The Greatest Economic Transformation

It may seem strange, but we have been undergoing a battle of economic philosophy that transcends so many concepts that unless we step back, we will have difficulty understanding the trend. This battle has often been laced with efforts to control mankind. For within this battle, we will fight religion, politics, scientific innovation and progress spanning technology in all areas, but also issues that include both slavery and labor that all create what has become known as our economy.
Sometimes we are too close to a problem that it is just impossible to see. When man landed on the moon and sent the first pictures of Earth rising, only then could we see what our world truly looked like. We are facing the very same problem. The change that we now see and are debating, is still from the view of a fly on an elephant’s back. We do not know we are even on an elephant or what is an elephant.

Our society is still growing and changing. We are going through puberty where the youth rebels against the parent. The profound change, the Great Economic Transformation, became bluntly visible back in 1989 where the world economy began to change with the fall of Communism. That fundamental change was truly an Economic Transformation wave which is now causing the collapse of socialism in the Western nations. What we are facing is confusing. Nevertheless, if we want to see the elephant, it is time to take flight.

There is a very core structure to the economic society of man. The Industrial Revolution was not just a slogan. It is hard for modern man to look back from where he now stands and comprehend the meaning of “revolution” as it was truly expressed. The way of life prior to the Industrial Revolution remained essentially the same from Greek times, Rome, middle-ages, and the birth of the United States. The word “Economics” was an English translation of a book written by a great mind and a diversified man of tremendous experience – Xenophon (ea 431-350 BC). Xenophon was a brilliant, practical man. He began life early on as the commander of the elite Greek force known as the “Ten Thousand.� Xenophon admired Socrates profoundly, and developed a dislike for extreme democracy for the very crime it had committed by ordering Socrates to be executed for his ideas. Xenophon wrote three works on the subject casting Socrates in a different light than that of Plato – the “Apology” – �Symposium� – “Memorabilia.” Yet in the field of finance and economics, his political work is what the powerful committee on Capital Hill is named after – “Ways and Means” written around 351 BC advocating peace rather than war between the Greek states. But we owe the very word �Economics” to the title of his truly master work – “Oeconanicus” that simply meant in ancient Greek – how to regulate the household. It was a How-To Book for Gentlemen Dummies that explained how to manage your estate from growing crops, managing slaves, and your wife.

What does this have to do with the Industrial Revolution? Everything! Life as society knew it was completely different before the 19th century. The same economic model had existed for thousands of years around a self contained farm-like enclave. The Romans called them “villa” and we call them “plantations.” This is how society operated. Villa were independent estates that were virtually self-sufficient. The work force was composed of slaves purchased after battle in ancient times, or serfs in the middle-ages, or imported African slaves. The King of England had even used the criminal laws to create labor. Any misdemeanor allowed the King to sell someone as a laborer for a certain period. Instead of prison, you were sent, at first, to America. When the American Revolution began, the destination changed to Australia.

During the 3rd century AD, money became rare following a hyper-inflation. This caused tremendous hoarding and an economic contraction strengthening the villa model. The Roman Emperor Diocletion (284-305 AD) tried, to revive the empire like Ronald Reagan & Margaret Thatcher, and created many of the practices still employed today. To be able to collect taxes, passports were created and people could not move without permission. To tackle inflation, he substituted wage and price controls as did Richard Nixon. He redesigned the entire monetary system, i.e. Bretton Woods 1944.

When Rome fell after 476 AD, the concept of the villa prevailed. Life survived because of this self-contained economic model. This evolved into feudalism during the 9th and 15th centuries due to the increase in population and the inability to acquire wealth to establish a villa. Towns would form and the landlord became the nobility. Castles were constructed because of the lack of security. Charlemagne (742-814) began to reconstruct the old Roman Empire. This economic model received its first major shock that not even the fall of Rome had inflicted. The Black Plague in the 13th-14th Centuries killed about 1/3rd of the population making labor scarce and causing landlords to start to pay wages in addition to a percentage of the crop and free housing. Yet, predominantly, the economy was still agrarian and the model was still the villa.

In Russia, the seeds of the 1917 Revolution were sowed during the reign of Ivan IV (the Terrible)(1530-84), when he confiscated lands of his enemies to give to his supporters. Ivan found the lands worthless once the serfs fled. He then decreed that the serfs would be bound to the land for life in order to maintain its value. He essentially made all Russians living on farms slaves of the state. This eventually created the pool of discontent that fueled into the bonfire of Revolution years later.

Of course in the United States, the slavery issue was recognized as wrong and a real problem, especially after the language written by Thomas Jefferson in the Declaration of Independence. This issue dominated early politics, and perhaps came to a head when the Supreme Court showed it was indeed, as Judge Posner refers to it, the “Political Court.” In 1857, the Supreme Court held that blacks were just property in the case of Dread Scott, who sued for his freedom when his master traveled to a state that did not allow slavery. The Civil War was not fought over racism. It was fought over the collapse of the economic system of labor. Racism emerged more so as a bitter response by the South attaching blame for their demise to the freedom of the slaves.

We can see that slavery was a very ancient practice as outlined by Xenophon in “Oeconanicus.” It was how the villa model maintained its economic viability for thousands of years. In Roman & Greek times, the economy was 90% agrarian. However, that declined to 70% in the 1870s, 40% in 1929, and finally 3% by 1980. It has been this villa model that was undergoing the Great Economic Transformation to the Industrial Revolution.

The Great Economic Transformation has been the growth of society through progress and technologies. We have been evolving even in our understanding of economics, since the nature of the economy is in fact changing with each passing year. We must look at this transformation and understand that as the changes in labor have taken place, everything else in our world also changes. Had it not been for the Black Death, there would never have been a shortage in labor giving birth to wages that led to payroll taxes.

The Battle Lines

Before we wage further, we have to explore what caused the battle between communism and capitalism. We can attribute this to Karl Marx (1818-1883) but this does not explain why Marx came to the conclusions that he did and set in motion decades of geopolitical conflicts that has cost the lives of countless millions!

We must understand that from the school of Physiocrats, who believed that all wealth was created only by nature, we end up with the runaway idea that man can create utopia – the imaginary world where man could live indefinitely under the perfect plan. This idea was sparked by Sir Thomas More in 1516 that created a whole class of thinkers who believed in this Utopian world was possible. Sir Thomas More (1478-1535) was a major influence and contributed to what we now face today under Socialism.

Marx railed against the change from the agrarian society to the industrial revolution. He did not see the State as the issue. What he saw was that this new economic model would lead to paid workers in factories who would be exploited to make a profit for the employer. Marx saw this “new” economic model as changing the world taking people from the traditional farm and turning them into consumers of products manufactured. However, he believed that their employers would be so greedy, they would decline to pay the worker. Eventually this new system would collapse because the greed of the employer would suppress the income of the laborer, and that would result in the collapse of this new evil experiment – industrial capitalism.

The battle begun by Marx between his Utopian ideal of communism vs. capitalism is not over. The Communistic system transfers power to the state, as does Socialism. This has sanctioned the power of a central government at the expense of the economic freedom of Capitalism. What we are really saying when we ask whether Capitalism is dead, is should we abandon freedom and run behind the walls of the castle since the state is the modern day landlord? Do we reverse this Great Economic Transformation, or understand what is going on for just once?

American Labor

Marx began a class-warfare that could yet tare the very fabric of our society to shreds. The beginning of the end of the labor union movement was marked seventy two years after the first real labor riot that took place on May 4th, 1886 known as the Haymarket Riot. The Taft-Hartley Labor Act of 1947 was designed to take away the power of the unions. By the 1960s, the unions were cast in the light as being evil and controlled by organized crime after the Jimmy Hoffa incident. This critical shift in perception curtailed the union movement after just one 72 year political cycle.

The collapse of General Motors is the collapse of the last vestige of Marxism – the labor unions. The foreign auto-manufacturers have set up shop in the South where the labor laws were far more favorable to create non-union work forces that have been quite successful. The foreign car manufacturers have demonstrated that unions are a bad idea. The union movements had their points from the outset. But working conditions should have been attacked in a political context (democracy). Unions assumed the mantle of communism creating confrontation and transferred the power from management to labor. It did not solve the problems and only became like a drunk who then had the keys to the liquor store – self-destructive.

The reason why unions were a bad experiment was because they merely turned the employer into a slave and altered the free markets that was contrary to the nature of mankind. Historically, when the crops failed in an agrarian model, people simply migrated. The Philistines of the Bible were most likely Greeks who migrated due to crop failures at the First Heroic Age. Invasions of the Goths, Germans, and even Attila the Hun were all caused by the “grass is greener” on the other-side belief. Unions just promoted increased wages rather than increased skills, diminishing the individual motivation to learn new skills and migrate between jobs. This is the same reason why communism died. Creating a system where one-size-fits-all, promotes a decline in human growth that is then manifest within the economic decline.

We have to understand, that the fatal flaw in Communism was to diminish the essence of mankind. They say necessity is the mother of all invention. That is so true. If we try to create utopia, we destroy the very engine that creates progress. Do not for one minute think that a labor union is any different that the communistic model. It is not. Where in a normal economic model, to earn more one improves his skills, the Communistic model promotes advances income without improvement in skills.

This union labor system stymied natural economic progress and created much damage to the benefits of the Industrial Revolution. This is the fatal flaw that had led to the destruction of American jobs. It froze the natural economic evolution and began a trend toward transferring jobs overseas. The trend was only accelerated by the imposition of the payroll tax that essentially increased the cost of labor. Historically, mankind migrated in an agrarian society. This very same trend still takes place today. However, instead of the work force migrating to better lands, the communistic model reversed the roles and caused the employer to migrate. What government did not notice, was this trend was not caused by the “greed” of the employer, but by the Invisible Hand of Adam Smith. Labor demanded the highest wages with the lowest productivity, and consumers demanded the lowest price with the highest reliability. The employer migrated to survive. Throughout history, human nature has never migrated for no reason. Migrations take place when prodded by the fickle finger of necessity.

Communism, when implemented as a government policy, lasted only one 72 year political cycle. In 1917, we find the Russian Revolution and Sun Yat-sen set up the rival government in China at Guangzhou as the Nationalists. Seventy-two years later, Tinennamins Square in 1989 was followed about five months later by the fall of the Berlin Wall. These changes were economically driven. The stagnation of the human spirit led to the steady decline in productivity. This is the same trend we have seen in the American labor unions.

What we must understand is that only when people lose their security, then and only then do we see political unrest. Just as humans did not migrate without reason, all political unrest is unleashed following economic implosions. As we shall see, the collapse of the Mississippi Bubble set in motion a irresponsible government policy regarding the money supply – the invention of paper money. This collapse of a European-wide speculative boom in 1720, set the stage for the great wave of revolutions that toppled the last vestige of Feudalism – Monarchy. It was not just the American Revolution, with its slogan, �No Taxation Without Representation,” but also 72 years later we come to 1792 and the overthrow of the French monarchy.

Understanding the Mississippi Bubble and the French Bailout that set in motion the Age of Revolution

At first, you might ask: Why look at something from 1720? Well, the answer is simple. The French Government was in part responsible for the Mississippi Bubble and contributed to its exponential rise at the end. The Government had to then bailout the mess and, to pay for it, implemented higher taxes. This is not so different from current events.

The Mississippi Bubble was a financial scheme not so different from the wild un-backed derivatives created by AIG and others. The scheme was at first engineered by John Law, an early economic theorist, who was friend with the Duke d’Orleans. In 1716, John Law founded Banque Generale, with the authority to issue notes that were the earliest form of paper currency. The following year, he founded Compagnie d’Occident (“Company of the West”) with the exclusive deal to develop the new French territories in the Mississippi River valley. This enterprise began to monopolize the tobacco and African slave trade as well. By 1719, he then formed the “Compagnie des Indes” that was essentially just renaming the “Company of the West” with a complete monopoly over all French trade. This new entity also assumed the powers as if it were a Roman governorship, with the power to both collect taxes and to coin money. This operation in essence assumed control of both the trade and finances of the French government.

It was this link and exclusive power with the French government and the vast expansion of unlimited profits in the New world, that created the image of the best possible investment. The public was naive. But they were also exploring how capital could be used to actually work and make more money. This was a novel idea for since the fall of Rome, during the Middle-Ages, there was no national organized state that promoted international investment. It was akin to the fall of Communism and the interest in investing in a new world of private investment in China and Russia.

It was this expectation of potential profits that created perhaps what may still remain as the wildest speculative boom in history. Between the discovery of America in 1492 and 1700, the majority of investment was professional or solely by the state. There was no opportunity for the public to get involved on a speculative nature. So this was the first true experience of allowing the public to participate is the new frontier. As this cycle unfolded, its duration would be 224 years from the discovery to the bust that set in motion Revolution. The shares of the lead enterprise, Companie de Indes, rose from 500 livres to 18,000. By 1719, 625,000 shares had been issued. This boom gave rise to the term “millionaire.� The boom was so profound, Compagnie de Indes was merged thereafter with Banque GeIlerale and the scheme was expanded to retire the national debt of France by exchanging shares for the bonds.

This led to a monumental speculative bubble that spread throughout Europe. A similar theme played out in England with the South Sea Company. The The South Sea Bubble transformed into a scheme to retire the national debt of England in return for shares. That entire incident occurred between late 1711 and late August 1720. The last stages of the speculative boom saw the shares rise from 128 1/2 pence to 1,000 between January and August 1720.

Back in France, the “Compagnie de Indes” was so successful without really producing profits that the French government began to get involved. The French government began to issue paper money itself. This was a form of derivative for the money was widely accepted only because it was convertible into shares of this new company. The vast economic expansion was fueled by the unlimited issue of paper currency between late 1719 and the fateful time of the year – September/October 1720.

The linkage between the speculative shares and the government finances created a bust that became the closest thing to a financial mushroom cloud. The bear market collapse was so significant, that by December 1720, John Law had to flee France. The collapse was fierce because there were no market-makers, middle-men, or a mature two-sided market. The concept of puts and calls had developed in the earlier speculative bubble known as the Tulipmania (1634-1637) in Netherlands. But that panic did not involve a debt crisis or the government issuing derivative forms of money convertible into stock shares. The lack of sophisticated market functions led to a one-sided collapse in both the South Sea Bubble and the Mississippi Bubble within three months. The English shares collapsed from 1,000 to 124 by December 1720 though the company did survive until 1853.

It was the collapse in debt that devastated the economy. The French government was forced into a bailout assuming all the debts of the company, and then, to pay for their own folly, began to raise taxes. That set in motion the resentment that led to the French Revolution.

The French Bailout The Revolution (The Bonfire of Discontent)

The involvement of the French government in the speculative boom, also placed the focus of responsibility for it upon the King. The raising of taxes to pay for the bailout set in motion the French Revolution fueling the bonfire of discontent. The Revolution began with the storming of the jail, Bastille Day (7/14/1789) as it is remembered today. This led the king to flee to his palace at Versailles in October 1789, which the people later stormed on June 20th, 1792. At trial, they referred to the King now as “Citizen Capet” and tried him for treason on December 1792. He was executed on January 21, 1793 followed later that year by his wife, Marie-Antoinette. The First Republic was declared on September 21, 1792. This citizen government simply failed until Napoleon took power in 1799 and eventually crowned himself emperor in 1804.

Consequently, it was the direct involvement of the French Crown and its very costly bailout that resulted in raising taxes and oppressing the people that led to the collapse of the French economy and ended with a Revolution. Looking at government to bailout the follies of the Investment Banks is a dangerous course of action. It shifts the burden to the Government and raises the risk of political instability in the long-run should the Government fail to reverse the trend. What if we end in hyper-inflation? The massive monetary printing and funding of debts could drive interest rates higher, which will compete with the common man and destroy his ability to survive economically. If we then turn to higher taxes to make those who did not cause the crisis pay for it (letting the investment bankers off the hook once again), how can we justify this vast transfer of wealth?

It Is Always Debt That Destroys The Best Plans and Foundations of Mankind!

The debt crisis is always distinguished from the mere speculative bubble. The Tulipmania did not change the course of history as did the Bubble of 1720. Likewise, the excessive borrowing by Spain and the desperate attempt to invade England to payoff those debts with its Armada in 1588, resulted in the collapse of Spain taking with it Italy, who was its banker. In the end, Spain and Italy lost their ability to be any sort of a world power. It is always debt that destroys a nation. It destroyed even Rome.

What we must understand is that we have been evolving as an economy for a very long time. Communism and Socialism are a mere blip on a screen. Governments� stepping up to bailout the crisis raises concern. For had we just let the Investment Bankers fail and stood behind the public deposits 100% in Commercial Banks, we would have been better-off. Sometimes, it is honestly best to let the free markets sort out the weak from the strong, because it is quite frankly, far too complicated to anticipate correctly – this is why Communism also failed.

Marx railed against the coming of the Industrial Revolution. He saw evil and was blind to the evolution of the economy as a whole. We are still caught-up in the philosophy of Marx. Phase One was the collapse of Communism. Phase Two, will be the collapse of socialism – state promises that are unfunded yet seek to still create the world of Marxism to a lesser degree. There is not much difference between the state taking title to the land, or allowing you to keep the title but dictate how it is to be used. Labor can no longer migrate, only capital.

The Communistic/Socialistic theory of Marx is collapsing. Our socialistic life may be coming to an end because our promises exceed our resources. This bailout is likely to push the government over the edge. If we cannot see how we make the same mistakes over and over again, what hope do we have? We can survive as a society only when we open our eyes. If we cannot do that, then we may be headed into a new dark age of feudalism with the break-up of organized states. We have to stop the debt and insane taxes before it is too late once again. We are in the last death throes of Marx�s ideas of Communism/Socialism. He railed against the Great Economic Transformation, because he remained just a fly on an elephant’s back. We can survive if we are rational and objective. We need to restructure or we will lose it all.

Martin A. Armstrong December 11th 2008

You may send comments directly to Martin Armstrong at ArmstrongEconomics@GMail.com

SILVERMEX RESOURCES LTD.: A Low-Priced, Emerging Silver Company

The following is automatically syndicated from Grandich’s blog. You can view the original post here

Silvermex Resources Ltd. Was formed in 2005 and taken public in August of 2006 on the TSX Venture Exchange (TSXV: SMR).* The company’s largest shareholder is Silver Standard Resources Inc. (NASDAQ: SSRI).

Silvermex’s primary objective is to increase shareholder value through the acquisition and development of near-surface, advanced-stage silver deposits in Mexico.* The company holds an impressive 85,000 acres of mineral claims located in Mexico’s most prolific mining production regions.

Silvermex has defined near-surface resources of 42.4 million ounces of silver and 240 million pounds of lead and zinc on its primary projects. Silvermex’s goal is to advance these projects to the prefeasibility stage in 2009.

Silvermex has a very low MCAP valuation per resource ounce of silver, currently trading at only $0.13 per ounce, plus base metals. The company offers superior leverage in increased resources and silver prices.

Silvermex is in the select and rare group of junior silver explorers that have established in-ground silver primary resources. Of this group, Silvermex has the lowest market capitalization at $5.3 million CDN or $4.3 million USD.

Silvermex’s projects are located close to infrastructure within low-risk mining jurisdictions.* The resources are near-surface and are potential low-cost bulk-mineable targets.

To date, Silvermex has raised $9.1 million which translates to some 4.7 ounces of silver delineated for every $1.00 raised or $0.21 per resource ounce owned or under option.* Future financings will fund development of priority projects toward the pre-feasibility stage.

San Marcial

The San Marcial project is located approximately 90 kilometers east of* Mazatlan in the state of Sinaloa Mexico. It is a past-producer with current total resources of 22.4 million ozs of silver. The indicated mineral resource is estimated at 3,756,000 tonnes averaging 149.2 g/t silver; inferred mineral resources are estimated at 3.075,000 tonnes averaging 44.21 g/t silver. The resource also holds 49.4 million* lbs of lead and 90 million lbs of zinc.* Each of these intersections is on or near surface.

This deposit is a near-surface, potential bulk mineable target which is open along a 1.8 km strike length and at depth. Preliminary metallurgical testing demonstrates 90%+ recoveries. San Marcial is under option from Silver Standard Resources Inc. whereby Silvermex has the right to earn-in 100% interest in the project.

La Frazada

The La Frazada project is a past producer located in the state* of Nayarit, Mexico approximately 300 kilometers west of Guadalajara.* The project has extensive underground workings and has a current high grade measured mineral resource of 304,000 t grading 259.6 g/t silver, an indicated Mineral Resources of 279,000 t grading 240.5 g/t silver, and an Inferred Mineral Resource of 534,000 t grading 224.9 g/t silver.

Additional base metal resources of 22 million lbs lead and 62 million lbs zinc in all resource categories offer increased potential for development. The resource is located near surface and is a potential bulk-mineable target.* Past production records indicate positive metallurgy.

Penasco Quermado

Penasco Quermado project is located approx 3 hours south of Phoenix, Arizona in the state of Senora, Mexico.* It is a past open-pit producer with a near surface current resource of 11 million ozs of silver. Recent metallurgical testing demonstrates 78% recoveries in 45 hours by 2 stage leach process.* This project is potentially a low-cost, open-pit target. Thus far, a total of 9.847 meters of core and reverse circulation drilling has been completed at Penasco Quermado. The deposit sits on surface and has a maximum depth of approximately 100 meters.* The near surface and oxidized nature of the mineralization suggest the deposit would have a low strip ratio and be amenable to low cost, bulk tonnage, open pit mining methods.

Bottomline
42.4 million Oz silver resources (NI 43-101)
240 million lbs of lead and zinc (NI 43-101)
1.42 Oz silver resources per share
443% resource growth in last 24 months
High resource return on money raised
The lowest market cap within its peer group
Low MCAP Value per OZ ($0.13 per Oz)
Near-surface, bulk-mineable projects
Proven management in Canada and Mexico
The Company’s objective is to advance its projects toward production. Preliminary economic assessments are scheduled to commence October 1, 2009.

Investors looking for undervalued situations which offer low MCAP valuations on established, in-ground silver resources with superior leveraged exposure to increased resources and silver prices, should consider this company carefully.

Silvermex is a client of Grandich Publications and Peter Grandich participated in its most recent private placement.

grandich.agoracom.com

Investment Rarities Inc. – Minneapolis, Minnesota

Coin and precious metals dealers who have supported GATA
and been recommended by our members:

Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Welcome to Investment Rarities Inc.

We encourage you to comment on your experience, recommendations, complaints below.

Arnold Armstrong

Courtesy of Casey Research

Arnold Armstrong

CEO & President, International Enexco
Director, Chairman, Red Hill Energy Inc.

Bio Arnold �Arnie� Armstrong is a man whose reputation precedes him. He has been a market-mover in the resource sector since the 1960s. He orchestrated the rise of Pyramid Mines, which discovered the massive lead-zinc deposit at Pine Point in the Northwest Territories of Canada in 1965. Pyramid was so widely held that the discovery set off a major flood of investment into the entire resource sector, and started a claim-rush that had every piece of land from Pine Point down to the U.S. border staked.

He dueled with the taxation department of Canada�s federal government for three years over the sale Pyramid Mines to Pine Point Mines. His legal expertise and focus on detail helped him put together an unstoppable case. Eventually, Revenue Canada (now the Canada Revenue Agency) gave up, and Arnold distributed every penny of the proceeds directly to his shareholders.

Arnold moved into the energy sector in the 1970s, working with a number of successful oil and gas companies. He also entered the real estate market, taking on Howard Hughes in Las Vegas for the rights to the Landmark Hotel. He ended up taking control of a chain of casinos in British Columbia, Canada, that has grown over the years into the Gateway Income Trust valued at around $1 billion. He�s operated in the real estate market through various companies, including View Mont Estates ltd., Panorama Origins Inc, Armada Investments ltd, Coral Investments ltd.

Arnold is the past chairman and chief executive officer of SKN Resources. He was responsible for taking the company � which was barely worth anything � bringing Dr. Rui Feng on board, and ending up with the world-class Ying silver deposit in China. SKN Resources became Silvercorp Metals Inc, and through the Ying deposit, it became one of the world�s major silver-producing companies.

The past president of Ivory Oil and Minerals Inc. (now Ivory energy Inc.); chairman and chief executive officer and last president of UGL Enterprises (now Red Hill Energy Inc.), he is also the president and director of Gibson’s Hotel Inc., which owns and operates a 370-berth marina at Gibson’s, British Columbia.

Arnold worked as the past president of the North Vancouver International Lions Club; past chairman of the joint management committee for the BC Society for Crippled Children and Kiwanis Mothers March.

Arnold holds a bachelor of law. He was called to the British Columbia bar in 1950 and continues to practice corporate and commercial law. Since May 2003, Arnold has practiced law as a barrister and solicitor with Armstrong Simpson, and prior to that, with the predecessor firm of Armstrong & Company.

Arnold�s legal tradition is bring carried on by the rest of the Armstrong clan. Arnold�s son, Brad, has a doctorate in law from McGill and works with him on the board on International Enexco, heading up the environmental team. His other son, Mike, is a lawyer as well. Mike works as part of Armstrong Simpson Barristers & Solicitors, defending other lawyers against charges of negligence.

With no intention to retire, Arnold is as active today as he was four decades ago.

Interview XL: Am I correct in saying you�ve been practicing law for over 55 years now?

Yes, I was called to the bar in 1950, so 56 years.

XL: And how did you first become involved in the resource sector?

Well, in the 1960s, I invested in a company. I put twelve thousand into it, and lost that. (chuckles) That�s when I decided I�d better get on the other side of the table. So I set up a company called Christina Lake Mines Ltd, and I went from there. Subsequently I became involved with Pyramid Mines Ltd. We financed Pyramid on a private basis. We were in the Highland Valley, first of all. That didn�t work out. So Henry Hill suggested that maybe we should take a look at Pine Point in the Northwest Territories, which is lead-zinc-silver. There were a few claims that were coming available, so I took a look at them and I said �We�ll buy those up.� So we bought those. I said �We should stake another 50 claims.� So we did…..

And then I said �Let�s stake another 50.� We eventually wound up, by acquisition and staking, with 427 claims. Then we did an IP survey. Harry Siegel was the guru on that particular type of geophysical work. We came up with a classical anomaly. We drilled it and we wound up with approximately 13% combined lead-zinc, but very thick, very thick. Well, the stock jumped up to $22, and there was pandemonium on the streets. (chuckles) People were stopping their car in the middle of the street and buying anything, just running into the stock exchanges � which were down on Howe Street at the time � and buying. So, we went from there. We brought in a couple of other parties to assist in the financing. Charlie Elliot and Bill Robinson, both out of Toronto. And then we went ahead and did additional drilling, and we proved up a substantial ore body. We sold that out to Pine Point Mines for $33 million

XL: Nice profit, I�m sure.

Oh yeah, it was nice. Then I set up another company as well, called Coronet Mines. I was staking up in the same area. Once we acquired sufficient claims for Pyramid, I went with Coronet. We wound up with another ore body. That was sold out to Pine Point mines as well. It was a smaller ore body. It was sold out for about $1.2 million. The discovery was in 1965, and sale took place in 1967. And then we had to battle with the tax department for about three years.

XL: What was that battle about?

They considered that the moneys from the sales were taxable. We took the position that they were not, because of the prospecting laws that were in effect at the time. We brought in a lawyer from Toronto. We documented everything. We interviewed every prospector. It was well organized. Eventually there was a meeting � and I�d already distributed half of the proceeds. So they wanted to tax us for the remainder plus 15%, so in other words, 115% of what we had. Walter Williston went in to meet with the Department of National Revenue, as it was then called. He phoned me and said, �Things are going very well, but they�re having a problem because they think that the minutes were doctored in the book.� I said: �Why would they think that?� And he said: �Well, they�ve taken a look at your minute book, and it shows that they�re torn out, there are certain articles, minutes from another book torn out and put into there.� I said: �Just a second.� So I talked to my secretary, Carol, who�s been with me for years. She eventually retired after 40 years. And she said: �Yes, well that�s right. When we got the minute book in, it was in the old form where they pasted everything in. I took everything out and set up the new minute book in the new way we do it.� Walter said: �Have you still got that old minute book.� And Carol said yes. So he said: �Can you courier it back to me?� So I did. They fitted everything together and saw that both books were the same. And that was the end of the case. They gave up and we distributed the balance of the proceeds.

XL: There must have been many examples, like this, when having a law background benefited you on the business side.

Yes, it helped.

XL: Did you have any oil in the �60s?

Not in the �60s.

XL: That was the �70s.

That was the �70s. We got into the oil side in the �70s. I incorporated a company called Enex Mines Ltd. NPL. These were the NPL companies. It was with a group in Edmonton. We were exploring for uranium in the seventies. We had Dr. Garnet McCartney, who was considered to be the uranium guru at that time. We went into the Athabasca Basin.

XL: Did you also have Woollett working for you?

We had Trigg, Woollett and Associates. We had Murray Trigg. He was retained through Garnet. He�s a very big man, about six-foot-eight. We wound up with a lot of claims in the Athabasca Basin which didn�t work out, except for one block of claims, and that was the Mann Lake claims, which we still have. We brought in Cameco first, for an interest. Then we brought Chevron in. Eventually, Chevron sold out its interest, partly to Cameco and partly to UEM. The net result is that they each wound up with 35% and we retained 30%. We retained it for all those many long years when the uranium price went down from about $26 to about $6 and it didn�t make sense to work on it anymore. You just couldn�t make any money off it at that time. But we did retain this interest because it had a huge boulder train, extremely radioactive. Murray Trigg was convinced that somewhere there we had an ore body. So over the years, we kept on doing our programs, making sure everything was in order and so on. First of all, we had UEM as the operator, and then, in recent years, it became Cameco. We drilled a number of holes. Actually, MN-5 � that we drilled a number of years ago � ended up in uranium, not in the grade that we required, but we did have uranium. We had very strong conductors. So a number of those were drilled, but we didn�t end up with the high grade that we were looking for. But additional geophysical programs took place over the years, and we identified a very strong conductor north to south. Then we drilled two holes, and one of them, it hit the non-conformity. The other one ended up going through four intersections, one grading 7.12% U3O8 over 0.25 meters, the second grading 5.53% U3O8 over 0.4 meters, and then there were two other thin sections. So we know we�re into an ore body, we just don�t know what size. Maybe it�s an ore body, but maybe it�s not commercial, but it certainly looks like we�re into a McArthur-type deposit. The McArthur deposit is 25 km to the northeast, and the Millennium deposit is 20 km to the southwest. So we�re right on the trend. Then you have Cigar Lake to the north, Key Lake to the south. Key Lake is mined out. Cigar Lake, well, everyone knows about the problems that they�re having.

XL: Just to back up, which company did it start out as first?

It started out as Enex Mines Ltd NPL. Then we dropped the NPL. Then it moved from there to Enex Resources Ltd. From there, the name was changed to Enex International Ltd. The final name change was to International Enexco Ltd, with our subsidiary being, Enex International Inc, that�s the U.S. subsidiary.

XL: I didn�t know the property had been around for that long in various versions of the company.

Yes, it has. Then, I had a company called Coralta Resources. That was when I got into the oil and gas business. I built that up to where we had a cash flow of $50,000 a month.

XL: When was that, that you had Coralta?

That was in the �70s. Then I eventually sold control of Coralta, and I was on the board for a while, and then dropped off the board. But in Coralta, on the oil and gas side of it, we drilled a number of holes in the Strathmore area, and had substantial production. We put pipelines in, several miles of pipeline, and a compressor station. To put that in I used a private company of mine, View Mont Estates Ltd, to put the capital up. And for that, View Mont Estates ended up with a 25% interest, which it still has.

XL: You also do real estate deals with View Mont, is that correct?

Yes, View Mont is a real estate company.

XL: Interesting. Maybe we can get back to that. But to concentrate on the past resource companies you were involved in, could you tell us about Ivory Oil & Minerals? When did that start up?

Oh, that�s years ago, in the �70s and �80s. We had a number of different projects in it.

XL: Were you involved from the beginning in Ivory?

No, I wasn�t involved right from the beginning. I came in at a later stage. It was Ivory Oil & Minerals at the time. Eventually with that company there was a reverse takeover that took place and now it’s Ivory Energy Ltd. I�m still on the board, and I�m a major shareholder. It�s controlled by Greg Hall and Ian Gallie. Ian�s the president, and Greg Hall is the chairman and chief executive officer.

XL: You�re also involved in Red Hill Energy.

I�m the chairman and chief executive officer.

XL: Right. And you�ve been with Red Hill for a while. Originally it was UGL Enterprises, right?

It changed its name a number of times. And eventually, the last change was to Red Hill. Ranjeet Sundher is the president of the company. We eventually evolved into a coal company. There�s a deposit called the Ulaan Ovoo deposit. We completed a 43-101, which proved up 208.8 million tons of coal with an average BTU content of 10,000. So it�s a very substantial deposit. Then we have acquired the land all around us so we�re going to increase that as we go along. We have another one called Chandgama, which is close to the capital of Mongolia with 70 million tons. I think we�ll be able to prove that up as we go along to 150 million tons.

XL: Seems like a smart move to be involved with coal in that region. I was just reading about all the coal plants China plans on building.

Yeah, the timing is good. This may very well be a power source because we are on a grid in-between Russia and China. I mean, it will cost a huge amount of money. Maybe up to a billion dollars to put the power plant in. That is one direction. The other direction is to go into an operation whereby we ship to the railhead in Russia, and then into Japan, or South Korea. There is a Russian company that is doing that right at the present time, shipping coal on the Russian line into Japan, and they�ve made overtures to us. We have quite a number of people really interested in this particular coal deposit. And then we�re in the uranium side as well over there. We have 13 uranium properties. We have a joint venture with Mega. Mega has a right to earn a 50% interest by the expenditure of $1.5 million, and they had to give us a couple shares as well, which we sold for approximately $500,000. To earn a 60% interest, they have to spend an additional $2 million. We�re the operators, and we have a substantial crew over there, and a drilling program and so on.

XL: One of your biggest successes was putting together Silvercorp, which was originally SKN Resources. I was hoping you could give us a small overview of how that process came about.

SKN had been Spokane Resources, and we had done a lot of work down in Mexico, which didn�t really prove out. So, there�s a Chinese chap named Dr. Rui Feng, or Ray Feng, and he was involved in China. We got together and talked about it. We decided to bring Rui in, roll the stock back, and go into a specific property in China. As it turns out, that property didn�t work out. We had the minerals, but they weren�t economic. So there was another property that Rui had identified, which was a silver property, that�s the Ying property. He decided to put that into the company, and it went from there. Now it�s in production, making substantial profits. As of today, it was trading at $21.75. So it�s been quite a remarkable success.

XL: Built up from a reasonably small company in the beginning.

It was built up from nothing into this company. Rui Feng, he�s built a mill that does a thousand tons a day, together with administration buildings and all the support materials, ball mills, etc. He did the whole thing for approximately US$6 million. Just unbelievable. Mind you, he had put two other properties into production previously. So he did a remarkable job on that. Now there are 800 workers over there. It�s maybe the old style of mining, but with the cost of labor, it makes sense. So the company is really doing well. The Ying deposit on the high-grade portion of it, worked out to about $1000-$1200/ton. (points to a rock gleaming with silver sitting on a window ledge in the boardroom) That�s about a $1000/ton material right there. So what happened was in building it, high-grading the property and shipping the ore, actually the cash flow built the mill. Then the company did raise $60-odd million at $19.50/share. But that money has never been used. So the company is now sitting on $75-$80 million, it�s in production, and making, well, $40 million in the last quarter. He�s done a beautiful job.

XL: How has Silvercorp overcome the difficulties with permitting that stymies so many other companies working in China?

When you�re going into a foreign country, as far as I�m concerned, you can�t just go in yourself. You�ve got to bring in people from that country that speak the language and that are familiar with all the officials and so forth. Rui Feng is able to put these permits through and get things done on a really accelerated basis. He�s done a fantastic job.

XL: And what was your involvement? You basically went and found Rui and brought him in?

He was with another company. He was with a company called Pacific Minerals and he wound up coming to our office. And actually Paul Simpson was the first one to meet him and introduce him to me. But he has a mine in production in his own name in China, so this is really interesting to me.

XL: He already had some experience.

He put two mines into production before this one.

XL: So that�s a few of the bigger companies that you�ve been involved with in the past. Are there any others that we missed?

No, I don�t think so.

XL: I love the story about how you almost went head-to-head with Howard Hughes over a casino in Las Vegas.

Oh yeah, that was part of our history. That was when Ray Maclean and I decided that we should get behind the tables, just like we got behind the tables in the mining industry. There was a hotel that came up for sale, the Landmark. Howard Hughes was involved at that time. He had the Fronteer, and the Sands, and the Stardust, and one other. He put in a bid of just over $17 million for this Landmark hotel that had a casino on the top in a revolving floor. The gaming commission didn�t want Howard Hughes to buy this hotel because he was practically controlling Las Vegas. He was also a recluse at that time. So what they did was, they put it out that if anyone came in and made an offer of the same price, they would approve it. So Ray and I went down, and decided we�ll buy it. We dealt with the Teamsters. They had an $11 million mortgage on it. I got them to increase it to $13.5 million. Another company agreed to put up $2 million for me, and all the equipment and so on. We were all set to go, and then we got scared. We didn�t know enough about the casino side and we wondered if we could be killed for this. So, in the end, we decided to back off. But we learned a lot, and we really got to understand the situation. So when three casinos up here came up for sale, it was referred to Ray Maclean. He got together with me, and I drew up all the documentation on acquiring them. I also took an interest, as I normally do. That�s the origin of the Gateway casinos, and the Gateway casinos have been quite a success story.

XL: So you didn�t end up in Las Vegas, but you ended up getting three nice casinos in BC.

Yes, and some of the casinos were rolled into an income trust, Gateway Income Trust. They own the Burnaby casino, and four casinos in the Okanagan, Vernon, Penticton, Kelowna, and Kamloops, as well as the Palace casino in the Edmonton Mall. The deal was that our company, Gateway Casinos, would develop a property and then they would have a first right of refusal. We built a hotel in Langley and we built the Cascades casino, and that was vended in to the income trust. We still have the Star casino in New Westminster, and we�re building another new casino in New Westminster. It will be finished this year. That will be vended into the trust as well. And then we have the Baccarat casino in Edmonton. So, it�s evolved into something really substantial, worth maybe over $1 billion.

XL: It�s interesting that you went into casinos when so many people consider resource stocks a big gamble themselves.

Oh yeah, it�s just another gamble.

XL: You�ve been around through the Vancouver Stock Exchange days through the Bre-X scandal to the development of the 43-101. I�m sure that our readers would like to hear your view of how the resource industry has evolved over all those years.

Well, back in the 1960s, things were fairly loose. We didn�t have the regulations we have now. Back then, you would just hop on a plane, head across to Victoria, and meet with the superintendent, who at that time was Bill Irwin. You could put things through fairly rapidly, as long as you had a background and a reputation of integrity. One situation I put it through in one day, which was just remarkable. But after Pyramid, you wound up with an element that came in, out of Toronto, and they weren�t here to build mines. They were here to fill treasuries, and pump up companies, and so on. So we had an unsavory element that took place out here for a while. But gradually, the regulations started to tighten up. Now it�s not that easy to put things through anymore. You�ve got to spend time, and there�s a tremendous amount of paperwork. And it�s getting more and more so.

XL: Do you think the paperwork has become too burdensome?

Well, it is a very important aspect. You have to have knowledgeable people working for you now. We have a chartered accountant who has three degrees, and we need him � badly! You have to be knowledgeable about the rules and the regulations and make sure your filings are made and so on. The role of the lawyer has become much more important in the past few years, as well as the roles of the chartered accountants, and the chief financial officers. You�ve got to have a good, solid chief financial officer, and they�re difficult to get. Some people have bought a company just to get a chief financial officer.

XL: We haven�t mentioned the Contact Lake deposit that you have with International Enexco. That�s going to be big.

I started to mention that with Coralta. At the time, I was working on a property with a chap named Ken Chattin in Contact, Nevada.

XL: And what time period is this?

This is around 1973. We drilled a number of holes. We proved up about 7.3 million tons of 2.31% copper, and a half an ounce of silver. But the price of copper dropped on down below $0.60. To mine it, our costs would also have been about $0.60, and that didn�t make any sense. So we put it in mothballs. Then we farmed it out to Phelps Dodge. It was a very tough contract with them at the time.

XL: You basically bullied them, right?

Yes, I suppose so. But it wasn�t smart. So, they drilled this hole called PD-4. It was into the sulfides and it went down 2,200 feet, and wound up with one section of 22% copper, together with gold and silver, together with another section that was around 20% copper. Overall we ended up with around 15 feet of approximately 21% copper. They called it a million-dollar hole, in those days. A million-dollar hole then is like a ten-million dollar hole now. But that�s when the copper price dropped way down. With everything depressed, and Phelps Dodge were putting two huge mines into production, so they walked. We retained it for a number of years after that. Then we farmed it out again to a company called Golden Phoenix. They had it for seven years, but the price of copper was still down, fluctuating between $0.60 and $0.70. Well then, luckily enough, they defaulted. So, I took the property back. That was two years ago now. Then I immediately went in and staked everything that was open, and luckily it was open. Golden Phoenix had some other claims that were important to us, so I negotiated a deal whereby I took control of those over from them, in return for giving them a release from the claims against them. That�s the way it was at that stage. Then we did a 43-101 on it, and we proved up a substantial tonnage. We�re now at the stage where we have about 14 million tons, proven and inferred. We�re on a drill program now where we�ve drilled four holes and we�re on the fifth hole now.

XL: Your goal is to double the resource to 28 million tons, right?

Yeah, but I�m not too sure we�re going to do that. What we�re doing is taking it one step further to the proven stage with the oxides. Then, we�ll go into the exploratory on the PD-4. That�s into the sulfides. But the idea is that I�m going to bring the oxides into production because we do have substantial tonnage.

XL: Why have you not twinned that PD-4, just for market attention?

I know that people talked about why I was not doing the exploratory. We went out and raised about $16 million for the treasury. I want to put it into production. If I go full tilt, the earliest I can do it is in two years. The drilling program has to get to the stage where I have measured tonnage. We�re on a 6,000-meter drilling program at the moment. We�ve just secured another drill. And we�re going to have another 6 000 program. When we�ve done that, we�re ready. I�ve hired an engineer. He�s got his Ph.D. and he�s going to do the metallurgy, and the mine planning and so on. So after this is done, we�ll do the exploratory work, but at the same time we�re going to be getting everything ready for production. That�s the game plan. So the company is doing very well. It�s got proven, well, I call them proven reserves. They�re not really at that state, but they will be, very shortly. Substantial tonnage, ready to go into production from the oxide standpoint, maybe it�ll be heap leaching or maybe it�ll be a ball mill. Maybe it�ll be an SXEW plant. All of this will be determined as we go along. That�s why I�ve hired the other people. Then I�ve hired another man to work strictly on permitting, and then I have our project geologist as well. We got a nice little team put together down there, and it�s working well.

XL: Someone like you who�s been in all these different cycles, when you feel today�s euphoria with people saying �Ah, uranium�s going hit a hundred bucks.� Could you tell the readers about the past cycles and say whether or not it�s the same sort of feeling.

In the sixties, when we had Pyramid, it was wild jubilation because it was so widely held. And that carried on. Then we had a lull in the �70s. And then in the late �70s, it started to boom again. In the �80s � just the beginning of the �80s � everything went all to hell again. So it�s like a business cycle, ups and downs and ups. And then, in the late �80s, it started again. This boom that�s taking place right now is unprecedented.

XL: Really?

We have never ever had a situation where every metal has moved up. And all together. Not just a small amount either, it�s substantial. I mean, who ever thought you were going see a time when copper would go as high as it did. We use a figure of a $1.25/lb to $1.50/lb for copper, by the way. But, you know, gold is moving. I see gold moving further because of the weakness in the U.S. dollar.

XL: Arnie, your vision of the dollar. You were around during the currency crisis, you were around when the U.S. dollar de-coupled from gold. What do you see happening with the dollar?

Well, with the dollar, it�s quite obvious. They can�t keep printing money. And that�s what they�re doing. They�re just printing money unbelievably, which is inflationary.

XL: More money is chasing the same number of goods.

You can print money if your gross domestic product is increasing, steadily. That gives you the right to print money. But the minute your gross domestic product starts falling off, you�ve got to stop � but that�s when they want to print money, that�s when they need to print money. That�s the problem.

XL: Arnie, if you don�t mind, could you recount the story about you and Murray Pezzim for our readers. He was another legend in mining. And, by all account, The Pez � as he was called � was a real character.

It was Pezim and Glick, the two, they were a pair. Pezim and Glick were together.

XL: I don�t know anything about Glick. Can you give us the background?

The best I can remember his name was Alan Glick. And they were involved together back east in the stock business.

XL: In Canada or in the States?

In Canada. No, they were from Toronto. Pezim was a butcher, I mean, literally, he was a butcher. That�s what his business was.

XL: A meat butcher?

A meat butcher. Pezim was a butcher. Yeah, but he was a very glib butcher. And he got involved with Glick. And they started buying and selling stocks. And they were opportunists as well. And so when Pyramid hit, of course, every stock went crazy.

XL: So they were in Pyramid?

No, they were not in Pyramid. But, you know, Pyramid was known right across the country. I mean, it was just a bonanza. And so every stock was going like crazy. Every claim from Pine Point down to the border was staked. Thousands of claims. And it was just one of these great claim rushes. It was a natural for forming new companies. People were wanting to invest and so on. So out come Pezim and Glick. They rented the suite at the top of the Georgia Hotel, which was all in pinks and purples, and call girls. And they invited the Pyramid Group, which was us, to come down. So I went down, and I went up to their suite. And this is where I met him for the first time.

XL: So this is in what year, �65?

No, this would be �66 because it�s after Pyramid. And that�s when my wife said when we left. My wife said �If you get involved with that man, I�m leaving you. That�s it.� And I said �I agree with you.�

XL: How old was The Pez at this point, roughly?

He was in his late 20s, early 30s. I think Glick was a little bit older than him, maybe four or five years. He was a quiet sort of a guy, very bright. So I didn�t get involved with him at all, until we took over a company, which eventually became Trian Equities, but originally the name was Tri-City Resources, and I had been asked � this company was run by geologists, they were all geologists � and one of them had asked me to work with him. And so we started buying shares in it. We wound up with a substantial number of shares. And then one of the brokers who represented quite a large number of people, he was kind of tired that this group of people weren�t doing anything. They were out staking and acquiring claims, and I think they had their own agenda, sort of. So they wanted to put other people on the board. So they came to see Ray Maclean. We met with them a number of times. Then I asked my friend on the board what he thought of it, and he said he didn�t want any change. And I said �You know, this group of shareholders are really unhappy, and they could be a problem.� And he said �Well, that doesn�t matter we�re not going to do it.� So anyway, we ended up with a proxy battle.

XL: With Glick and Pezim?

No-no. They weren�t in there at all. I�m just telling you how this occurred. So, there was a big battle. And we wound up taking over control because we had the shares. And because of the fact that the board was against us � the ones that we were taking over from � we took �em all out. And I wanted my friend to stay, but he said �Oh, no, I�m not staying. I have to stay with my group.� And I said �Well, fine, I appreciate that.� I remember his wife was furious at me. Then what this group did was they went out and they got a hold of Murray Pezim. They said �We need your help, can you come along?� Well, pardon me, they went to him before the battle. And so they had acquired shares, but not enough. Well, then after we had control, Pezim went out and kept on buying and buying shares. So pretty soon he wound up with approximately fifty percent of the shares. Well, we couldn�t win, so when you can�t beat �em, join �em. So I called a meeting with him. And I said: �What we�ll do is we�ll set up a board where there�s five and four.� I knew they wanted to have five. So I said �OK.� We had three million dollars in the treasury, by the way, at that time. So I was on the board, and then Bill Irwin, who was the superintendent of brokers, he was hired as president. And then they set up an executive committee which consisted of Bill Irwin and myself and Pezim. And we had one meeting. Pezim proposed something and we said �No, we don�t see it that way, and we won�t go along with you on it.� And that was the last meeting we ever had of the executive committee.

XL: It was the first and last.

The first and last meeting of that executive committee. Bill was still the president and he and I were good friends, good business friends. We just saw eye-to-eye on business, that�s all.

XL: And whatever Pezim proposed was fairly ludicrous, was it?

I don�t recall what it was, but it just didn�t make any sense. Let�s put it that way. To either of us, and we�re businessmen. So, then what happened was Pezim had a private company and, without consultation, he wound up selling preferred shares in that private company worth three million dollars to our company. With nobody knowing it, and I�m on the board. So I said to him, �Murray, you can�t do that. You have to put that money back. You�re taking a liquid asset of ours and you�re putting it into a private company with no liquidity whatsoever, and no justification for it.� So I said, �It�s a conflict of interest. You didn�t have the approval of the board. Put it back.� Well, he wouldn�t put it back. So he was down in Scottsdale at this time. And I went down to Scottsdale. He had this new wife who was really quite a gal. He had several wives, as you know. This one was really in superb physical shape. She had her own gym, and kept in really good shape. Later on, she socked him at a board meeting. (chuckles all around) But anyway �

XL: Did that really happen?

Yeah, it did. But anyway, on this situation, we were down there, and I said �Well, look, Murray, we�ve got to reverse this. I want the money back in. You go in as chairman of the board, but Ray is going in as president. And we�re taking over with six and five. You can have your five.” It was Les MacDonald and his crew. And he said �Ok, well, I�ll do that. But I�ll do it, if you�ll go on the basis of six and six.� �No,� I said. �No, I wouldn�t do that. It has to be six and five for us. But you�ll be the chairman.� And so he eventually agreed. And I went back and I met with the Board. And they said �What agreement?� And I said �OK, that�s it.� So I immediately called a meeting, and I laid out exactly what had occurred, and how this three million dollars had moved, and an action had been commenced. I commenced an action right away, by the way, against him, for fraud. So it was a real to-do then. He got Farris and company in, and they were all yippng and yapping. And we threw them all off of the board. Then at the meeting they all came in saying �Hey listen, let�s compromise. Why are we fighting?� and so on, �Why can�t we get together?� And I said, �Look, you had your time and you�re going.� So I kicked them all off the board. And we took over. And I guess that�s probably the last time I dealt with Pezim.

XL: That was concluded in�?

That was in the �70s.

XL: Were there any other characters like Pez?

No, Pez, as far as the market was concerned, he was unique. At one time, over 50% of the total shares that were trading on the Vancouver Stock Exchange were through Pezim. He was that powerful. But the trouble was that he was a manic-depressive. And he was such a good salesman that he sold himself. He got convinced the stock was going higher and higher, so he bought himself. Of course, eventually you run out of buyers and the stock came down because there was no one there to support it. And it would go down and off the boards. And then he would just be totally depressed and would go down to his place in Scottsdale. And he would be sort of a recluse for five months and then he�d get back into his manic stage. And he would come back. And his buddy, Art. While Pezim was buying, Art was selling, always. This was a pattern. So Art would have all the money. Pezim would be broke. He�d go down, he�d come back and he�d get together with Art again. And Art would say �Ok, if you�re all set and you�re in good shape, I�ll back you.� Then he�d get back into another company and off they�d go again.

XL: What made Pezim such a great salesman?

He was absolutely flamboyant. He was the president of the BC Lion�s Club here for a while. He bought the club for a while.

XL: I wanted to ask about your son, he�s on the board of International Enexco.

Oh Brad, he heads up an environmental team. He got his degree at UBC in Economics and Political Science. And then he went to the London School of Economics to get his master of science in economics. He was offered a scholarship to go for his doctorate. And he decided not to. He decided to go for law, so he went to McGill. So he did law and he was in the Senate for McGill. Then he joined Lawson Lundell. He�s a very good lawyer.

XL: He seems to be following in well-traveled footsteps.

He�s probably better than me. My other son is Mike. He�s with our firm here. Mike defends, primarily, lawyers that are charged with negligence. He�s very good.

XL: I didn�t realize you had a son in this office.

Oh, yeah, that�s Mike, yeah. He�s highly regarded because you know, because he�s constantly defending lawyers. Oddly enough, the ones that are charged with negligence are the ones that are really good lawyers. They�re just so busy, they just overlook a few things, along the road.

XL: Arnie, what�s your secret?

I don�t have any secrets. I just get interested in things. And money doesn�t matter anymore, obviously. But I just like to be successful.

XL: You�re not interested in retirement?

I don�t know why anybody who enjoys their work would retire unless they�re retiring to something they enjoy better. And I don�t see it. I mean, if you retire, you go in for golf. Well, all of a sudden, you get so involved in golf, that it�s just work. That�s your work, is golf. Well, who wants golf for work? I like deals. And I like people. I like putting things together.

XL: You�re so active and vigorous. What�s the key to your longevity?

I work out every day.

XL: Every day, really?

I work out every morning, every morning.

XL: One question that we like to ask everyone that we put in the Explorers’ League is that you can point out as fellow colleagues who are also doing an excellent job, or industry leaders?

There�s all sorts. There�s Mike Jones of Platinum Group Metals. He�s terrific. There�s Mark O�Dea, who�s at Fronteer Development.

XL: Anyone else?

There�s George Cross. You�ve met George, haven�t you?

XL: No, not yet.

George Cross had the George Cross newsletter. His father had it before him. And everybody knows him and he�s very bright. George and I have lunch once every one or two months or something like that. When he comes across something really interesting, he calls me up and says �I want to bring this fellow to lunch.� That�s how I met Mark O� Dea. That�s how I met Mike Jones. And I liked them. So my attitude in investing is, first you look at management. If management is good and has a good track record, you can go with it, even if the project isn�t as good. If there was one company that had great management and a mediocre project, and another company that had a great project and mediocre management, I would go with the people. That�s what I do. So I go with the people.

XL: Well that�s the whole idea behind the Explorers’ League, too. Here are some of the guys with the best track records. Just look at what they�re doing. And you�re one of them.

Well, thank you.

XL: And thank you for all the great stories.

Anytime.

More Info International Enexco website Quote: V.IEC IEXCF Red Hill Energy Inc. website Quote: RHFFF V.RH

Dow Jones Industrials -40% Declines 1885 to 2008

Dow Jones Industrials
-40% Declines 1885 to 2008
Mark J. Lundeen
Mlundeen2@comcast.net
12 October 2008

From 1885 to 2008, (123 years) the Dow Jones Industrial Average, (DJIA*) has fallen -40% from a bull market high on only nine occasions. Such deep bear markets are always historic and distressing.

Using my “Bear’s Eye View” (BEV) chart below, we see 123 years of DJIA market history in chart format below.

The above BEV chart is “adjusted” for the 1929 to 32 crash. The chart below is unadjusted.

As you can see, without the adjustment we lose data on the Bull-Bear cycles of 1938 and 1942.

My BEV Chart presents a unique view of the 123 year history of the Dow Jones Industrial Average by rendering each Dow data point into specific percentage information ranging from 0% to -100%. This format allows direct comparison of every bull and bear market cycle from 1885 to 2008.

For those who are familiar with my BEV chart technique and my 1885 to 2008 DJIA factor unified data series, they may want to skip down to the BEV charts below the next few paragraphs.

When new all-time highs occur, they are recorded as 0% in the BEV chart. So understand that bull markets are seen as a series of 0% in a BEV chart. All other data points that are * not * new all-time highs are reduced to a precise negative percentage decline from its last all-time high. There are compromises in processing market data like this, but more is gained than lost by compressing 123 years of DJIA history into percentage terms bounded in a range between 0% to -100%. Charting the data as published actually provides little historical information due to the effects of monetary inflation over the decades. Below is a chart of the unaltered data I used in creating my DJIA BEV charts. Compare the information displayed by my above BEV charts with what you see below.

(*) A quick note on my data is in order. The Dow Jones Averages had many modifications over decades to arrive at their present construction. In 1885 Charles Dow compiled a single average of 14 stocks consisting of 2 industrial and 12 rail-road companies. The current 30 stock Dow Jones Industrial Average was not published until 01 October 1928. The data charted and used in the table above uses Dow Jones approved sources of what is available from Dow Jones from 1885 to 1928. Dissimilar data series were combined into one unified data series by the use of factors. The author chose to use his unified data series in the table for continuity purposes for the 6,452 weeks of data of the Dow Jones Averages. So the values listed in the above table prior to 01 October 1928 will not match those published values as published by Dow Jones.
Just to satisfy people’s curiosity of how the S&P500 has done, here is a BEV chart of the S&P500 from 1978 to present.

The S&P500 also fell below the -40% line this week.

An examination of the nine times the DJIA experienced a -40% drop from an all time high.

With all that out of the way let’s look at the nine occasions from 1885 to 2008 where the DJIA fell below the -40% line in the above charts. To accomplish this I made nine charts from my factored unified data series. I have included approximately 52 weeks before the terminal bull market high and 52 weeks after the bear market’s terminal lows in each chart. The dates given on the charts are for the period charted, * not * the period of the bear market decline. Remember, I included a year before and after the bear market in the charts. However, the weeks listed in the table are the number of weeks from terminal 0% to terminal bottom in the bear market.

There is much to be learned in studying these nine charts. Keep your eyes on the following.

1. Look at the bull market’s series of 0% data points leading up to the fall into a bear market phase in the cycle. Specifically how deeply does the DJIA correct before and after the last bull market all time high or in BEV terms the “terminal 0%?”

2. Does the bear market decline orderly, in stages, or a catastrophic terminal collapse?

3. After the bear market terminal low, does the new bull market take off like a rocket or gradually collects its strength?

With little commentary on my part, now onto the BEV charts of DJIA weekly closing prices. But remember, before the bull market’s terminal 0% and after the bear market’s terminal low point, I have charted approximately 52 weeks of additional data.

The X-Axis is labeled in weeks as Excel does not do dates prior to 01 Jan 1900. From bull market top to bear market bottom took 6 years and 3 months.

This is a rather famous bear market. Horses pulled taxis on Wall Street and government was very small when this happened in 1906-07. It seems that this crash created the desire in high finance to have a central bank in the United States to prevent crashes from happening again.

This was the first boom-bust stock market since the Federal Reserve was created. World War One produced significant inflation via the Federal Reserve System that eventually found itself in the stock market and consumer goods. As in 2008, commodity prices in 1921 fell along with the stock market. But back in 1921 there were few “policy makers” to interfere with this deflation as it cleaned out balance sheets. That is always painful. Unlike 2008, the US Congress in 1919 did not make defending toxic credit paper a national priority and allowed the necessary deflation to occur. The pain was over in a little more than two years.

If you take a moment to examine the first two charts in this article showing all 123 years of the DJIA, we see a natural rule of thumb. With the exception of the 1929 stock market crash, once the DJIA fell -40% it signaled an all clear to start buying stocks again. In fact that is what people did in December 1929 after they saw a double bottom -40% declines in a 3 month period. The financial media of the time urged people to buy bargain-priced stocks. Remember this chart when we examine our current -40% lows of 2008.

Note on this rule of thumb: I have never seen anyone comment on this before in any financial literature. And I have spent many hours in research libraries reading decade old financial publications. But when plotting the DJIA with a BEV chart, the -40% rule just stands out and has only failed once, in 1929.

BEV charts display bear markets better than bull markets. Looking at the recovery from July 1932 to July 1933 the above chart shows a very weak recovery. The reality is that from July 1932 to July 1933 the DJIA increased by 154% even while the Great Depression caused bank closings, DJIA stock earnings were negative and US unemployment was over 25%!

July 1932 to July 1933 is the best year the DJIA ever had in its 123 year history. I suspect this historic bull move made money for only a very few. The 1929-1932,

-89% decrease killed off most of the 1920’s investment-banking industry’s customers. By 1932, the very thought of investing in the stock market, or borrowing money from a bank produced a sense of revulsion and dread in most people.

This was the second stock market crash during the Great Depression.

Note the beginning dates for the two charts above. I made the 1936-1939 chart its own bear market but also used the 1937 terminal 0% with the 1942 -51% DJIA decline. The -45% occurred in a world of soup-lines and high unemployment while the -51% decline happened in a world at war with full employment. Two different bear markets that share a common bull market terminal 0% point in 1937. It makes sense to chart these two -40% lows together in the above chart when looking at the 1942 low.

What I find amazing in the above chart is the V formation from September 1941 to March of 1943. The Pearl Harbor attack stock market decline started 3 months before Pearl Harbor. The actual bombing of Hawaii on 07 Dec 1941 only made a small notch in the chart. The sharp V bottom reversal happens two months before the Battle of Midway. There was no way Wall Street could have known that 3 American Aircraft Carriers would have had their way with the Imperial Japanese Fleet! It is amazing how prescient the stock market has been in the past on major events.

Here is the Post Vietnam War and then developing Watergate Scandal Bear Market.

Our current market plotted on a BEV chart is one nasty chart pattern. Watching CNBC on Friday 10 October 2008 anyone would think that the DJIA was having its worst week ever. But was it? No better way to quantify a bear market mauling than with a BEV chart. I took the data for 1929 & 2008 and aligned their terminal 0% point on the same starting line, row 6420 on my Excel file. I also included their previous 52 weeks prior to their terminal 0% to see the last year of their bull markets. The result is below.

In this race of shameful fiduciary irresponsibility, it does seem that the 1929 bear is the clear winner. However, back in 1929, Wall Street did not have a Treasury Secretary blasting the market with a congressional-approved financial “bazooka” or a Chairman of the Federal Reserve flying over Wall Street “dropping bales of $100 bills” from his helicopter to maintain “positive inflation in financial assets.” Give a “policy maker” a few trillion dollars to do something and something will happen. Last week’s performance in the DJIA shows exactly what those trillion dollars purchased for the voters, about -20% on the DJIA.

I expect a bounce before the ground opens up underneath the market in the months to come. Look at that double bottom just above the -40% line in 1929 just before the bounce from December 1929 to March of 1930. It looked good to Barron’s, Forbes, and the Wall Street Journal as they signaled the all clear to investors; just before the floor dropped out. Again, look at the first two charts in this article. In 1929, for the only time since 1885 to present, the -40% bear market low proved to be a lethal bull trap.

Personally, I think 2008 is a market with some catching up to do with 1929. The “policy makers” using bazookas and a fleet of black helicopters blasted hundreds of billions of dollars at the market last week, but “policy” couldn’t keep the 30 stocks that make up the DJIA from falling 20%. That is some serious disrespect.

Dude – it was as like those dollars were totally worthless or something. Wow!

There is a good chance that 2008’s bear will give the 1929 bear a run for his money. This may be the second time that a -40% will prove to be another historic bull trap. Washington, Wall Street and yes the American voters are corrupt all the way down to the bottom. The financial markets and the US dollar will not be far behind.

As a public service, I will provide a weekly updated GIF file of the 1929/2008 Bear Race to the bottom to any blogger who wished to make it available free to the public.
Mark J. Lundeen
Mlundeen2@comcast.net
12 October 2008

Chavez gives Las Cristinas to Rusoro

Chavez gives Las Cristinas to Rusoro
By James West
Thursday, January 15, 2009

Rusoro is having one spectacular year when most other companies are facing funding difficulties or even bankruptcy. Hugo Chavez just announced that he was going to develop the Las Cristinas gold deposit in a joint venture with Rusoro Mining (TSX.V:RML)

This coming on the heels of Rusoro’s announcement on Wednesday of a record quarter at its Choco 10 mill, where 38,868 ounces of gold were produced at a cash cost of US$358 per ounce. The Choco 10 mill produced 14,261 ounces of gold in December 2008. This marks the third consecutive month of record gold production and can be attributed to high volumes of ore processed from the Choco 10 mine which produced 9,234 ounces of gold with the other 5,027 ounces of gold coming from ore processed from the near-by Isidora gold mine.

The comments by Hugo Chavez were reported by Reuters late in the day on Tuesday the 13th, and caught the former owner of the property, Crystallex International (TSX:KRY), by surprise.

“In 2008 we created the joint venture Venrus with Russia, a Russian company and a Venezuelan company, an joint venture for the Las Cristinas fields,” Chavez said during a televised address to Congress.

Crystallex had been developing the Las Cristinas project over the last several years to have an initial production rate of 20,000 tonnes per day. Its ability to maintain its rights to the project were thrown into serious doubt when the Venezuelan government rescinded construction permits on environmental grounds.
The joint venture known as VenRus is a fifty-fifty partnership between Rusoro and the government of Venezuela, with each partner responsible for fifty percent of capital costs to earn fifty percent interest in the project.
The Las Cristinas deposit contains an estimated 17 million ounces of gold in both proven and probable reserves.

Rusoro is the “mining partner of choice” in Venezuela, and is the only foreign mining company to successfully finance, build and operate gold mining operations on a long-term basis.

The reasons for that are clear.

The company is funded in large part by Russian investors, and the largest single shareholder in the company is Vladimir Agapov, who owns 65 million shares of the company personally. Since Russia and Venezuela are ideologically sympathetic towards one another, its only natural that Venezuela would seek a Russian partner to help develop its mineral wealth.

And certainly Rusoro management’s inclination to embrace the “social/industrial” partnership structure that Hugo Chavez stipulates is a plus for the company, not to mention their track record of competently managing the operations within the country.
Many investors are wary of Rusoro’s ability to continue funding itself, but they overlook the fact that any of the projects that are subject to the fifty-fifty model come with half the funding already in place, since Venezuela is obviously in a position to pony up its share of development costs. With that half of the financing a slam dunk, it won’t be a stretch for investors from countries similar to Venezuela in political leanings to participate in the remaining fifty percent. China and Russia can easily contribute to that requirement.
In reality, with the partnership between Rusoro and the government of Venezuela growing stronger as time passes, its just a matter of time before these projects are put into production under Rusoro management.

Rusoro is also in the process of acquiring the outstanding shares of Gold Reserve Inc., (NYSE Alternext: GRZ), who is the concession holder of the Brisas deposit, another massive Venezuelan gold project with as much as 15 million ounces of gold likely.
Gold Reserve also had its construction permits rescinded on environmental grounds, and it is widely expected that Gold Reserve shareholders will tender their shares to the takeover bid,, which will likely be extended until mid-February to accommodate the policy of Gold Reserve.

So from an investor’s standpoint, with a company that potentially will control a combined reserve of 45 million ounces, it seems that Rusoro’s funding issues will not be problematic, and it certainly seems that the company’s status as mining partner of choice diminishes its political risk.

www.MidasLetter.com

Junior Mining Stocks: Canada’s Subprime

Junior Mining Stocks: Canada’s Subprime
Source: Trey Wasser, Pilot Point Partners LLC 12/12/2008

Prior to the recent market meltdown, the market for junior mining companies had already been experiencing a severe correction since its peak in early 2007. Despite rising and historically high metal prices, money began leaving the market, in earnest, in the summer of 2007. By late last year, the correction had become a full-fledged bear market. Then the credit markets collapsed in September 2008. This caused another leg down which also included the major mining companies and the underlying commodities. Many junior mining stocks are now trading at a market capitalization that is less than their cash holdings. Most are down over 80% from their 2007 highs. What went wrong in a market that held so much promise just 18 months ago? How can the market undervalue precious metal properties at $800 gold and $10 silver? Will the markets for junior mining stocks ever recover?

To answer these questions, we must look very closely at the cause of the demise. Unlike in the late 1990’s, there is no Bre-Ex to take the blame. There is not one major speculative company, with salted samples and geologists jumping from helicopters, for the market to point to and say “they ruined it for all of us.” The fact is that in an environment of easy credit, wild speculation and an “it’s different this time” attitude, many investors have been caught shamelessly doubling and tripling down in junior mining stocks that are now simply doomed to fail.

The parallels between the mortgage market in the United States and the junior mining market in Canada are striking because they are a product of the same loose credit policies. Based on the false premise that everyone should own a home, American bankers and brokers were allowed to leverage the housing market with a seemingly endless supply of mortgage-backed securities. They then leveraged these securities many times creating today’s still incalculable risk in derivative products. Today, shareholders are losing all their equity. Bankers and management have already made millions in fees, salaries and bonuses that were based on the “paper profits” from all these leveraged securitized transactions.

While we won’t (but probably could) make the case that Canadian investment banks operated on the like premise that everyone should run a mining company, the process is very similar. As money from yen carry trades and other loose credit sources poured into the Canadian Venture Exchange, PPOs, RTOs and IPOs flourished in the mining sector. A retired geologist and a financier could joint venture a property in an obscure part of some third world country and become a mining company. The bankers would gladly raise them $5 million, then $5 million more for fees that often approached 10% and also included a piece of the pie. The process was fueled by greed as “blue sky” was promoted as an “asset”, as defined by a 43-101 report. Insiders made millions on their private placement shares as the process was repeated over and over. No one really cared if there was a truly developable project in many of the “shells.” Drill rigs began turning, with geologists in charge, and a belief that the equity window would never close. Investment bankers were highly compensated, but few of the companies ever even received (or warranted) research coverage.
Leverage was added as companies morphed themselves into separate entities, one for gold, one for silver and one for base metal. Senior executives were often found starting a new company while still holding management positions at several others. The bigger the “blue sky” the more money a company could raise. In many cases, less than fifty cents of every dollar actually went into the ground as promotion budgets swelled. Many of the majors were even caught in the folly and invested into some overpriced or questionable projects. This added to the speculation as the ‘buyout” business model replaced the concept of building a legitimate mining company. However, when buyout offers did appear they were often rejected. Management proved unwilling to part with their ticket to the equity window and their place at the feed trough.

Barrick Gold’s (NYSE:ABX) 2006 buyout offer for NovaGold (TSX:NG) (AMEX:NG) was deemed inadequate by management and rejected. When the dust had cleared in April 2007, it marked the exact top of the market for the Venture Exchange. Barrick explained that their “fair and final offer of $16” was based on “deteriorating economics at Galore Creek and the newly filed litigation at Rock Creek.” At the time, these appeared to be face-saving excuses for a failed tender offer. Today, they seem more prophetic, as NovaGold struggles to survive.

Interestingly, many of the pundits and gold bugs who have been warning of the leverage and speculation in the U.S. mortgage/derivatives markets failed to recognize the same risk in the junior mining stocks. Most also failed to predict the deluge for mining stocks as those loose credit policies were arrested and unwound. Many actually participated in the leverage at the private placement level. Today, they continue to bash the U.S. Dollar although it stubbornly remains the safe haven currency in a financially troubled world.

Where do we go from here and when does the market for junior mining stocks recover? Unfortunately for shareholders, a majority of the companies will never recover. Many are out of cash and have no prospects for additional equity. These will slowly fold and their only legacy will be as historic drill results. Some companies have developed bankable assets and might secure some type of debt financing. The process will be slow and painful, much like mortgage foreclosures. Many cash strapped companies are now in “hunker down” mode. It appears that “hunker down” is mining terminology for “stop all operations and cover G&A as long as possible.” When their cash is depleted, many of them will also fold.

Unfortunately, even some of the best juniors failed to focus their resources on a flagship property and advance it into an actual development project. Easy capital enticed them to build a “pipeline” of properties more appropriate for larger companies. Investors were easily swayed with this “irons in the fire” business model. Today the market is seeing these undeveloped properties for what they are, liabilities not assets. There are a few that were smart (and lucky) enough to advance a project that is truly developable. These will receive additional equity, albeit at substantial dilution to existing shareholders. Others will proceed, without shareholders, as debt holders take over the projects. Some will merge. But, mergers won’t bail out existing shareholders as few premiums will be paid in the consolidations. Even the companies with projects nearing production are finding it difficult to finance construction in the current market. Companies with once profitable poly-metallic mines are being forced into “care and maintenance” at current base metal prices.

Easy capital is mostly inefficient capital. Looking at mining projects today, it is amazing to see just how little was actually created with the billions invested into the junior sector over the past several years. The capital was simply spread too thin. Way too many companies were created. But, like the mortgage market, it was mostly the securitization process that created profits for insiders, bankers and management.

With mortgage backed securities, somewhere underneath all that paper, is a house. The sub-prime analogy stops here. Obviously there will be no bailout for junior mining companies, but there will be survivors. There are some real developable mining assets, under all that paper, that are currently being severely undervalued. Unlike most other assets, gold continues to hold on to the bulk of its gains of the past five years. Base metals appear to be forming a bottom and their current underperformance relative to gold cannot be sustained. President-elect Obama has stated that he will develop a series of infrastructure-based jobs programs in the U.S. This build-out will compete for metals with China, India and other emerging countries as their growth accelerates in a worldwide economic recovery. Money will begin to flow back into commodities and other hard assets as credit market free up, early next year.

In this financially challenged market it is still difficult to differentiate the “baby from the bathwater.” Our North American Gold & Silver Explorers Model is currently following 24 companies we believe will survive to drill another day. Companies with cash flow or high cash balances will not only survive, but will be positioned to acquire new assets as other companies fail or drop properties. We are currently positioning our clients for a strong rally beginning in Q1, 2009.

A few of our favorites:

We recently visited Capital Gold’s (CGLD) (CGC.TO) El Chanate mine in Sonora. This is truly a first class operation. They are now producing close to 5000 ounces of gold per month at a cash cost of about $270. We believe that they will continue to increase production and achieve a 70,000-ounce profile in 2009. Capital has $11MM in cash, solid cash-flow and open credit lines. Being a U.S. company, their mining costs are currently benefitting from a stronger dollar versus the Peso. They are well positioned to pick up additional assets in Mexico.

Fortuna Silver (TSX.V:FVI) (NYSE:FVI) has over $40MM in cash and is operating their Cuylloma Mine in Peru at a small profit. They were smart enough to hedge the lead and zinc production, although most of the hedge will roll off in Q4. Next year they intend to shift production to the bonanza silver veins they have recently discovered on the property to keep the mine cash-flow positive. Fortuna has consolidated their San Jose property in Oaxaca, Mexico and should have an updated resource out early next year. They have completed construction on the first phase of the ramp and infill drilling continues to produce excellent results. We believe that the San Jose resource could grow to over 100MM silver equivalent ounces.

Eastmain Resources (TSX:ER) (ER.TO) has well over $20MM in cash from their recent offering and warrant exercises. Their corporate burn rate is very low and drilling costs in Quebec are partially offset with tax credits. The cash will support their current ($4MM) exploration budget for the next 5 years. Eastmain’s flagship asset is their Eau Claire deposit in James Bay, Quebec. They already have about 1MM ounces (indicated /inferred) and drill results continue to indicate a much larger resource. They will benefit from the infrastructure build-out at Goldcorp’s (TSX:G) (NYSE:GG) Eleonore mining camp. They have joint ventured their Eleonore South property with Goldcorp who is funding the current drill program. They also have several other properties surrounding the new camp.

C. F. Wasser III (Trey), President & Director of Research, Pilot Point Partners, has been in the brokerage and venture capital business for over 23 years. Trey spent 20 years as a bond salesman and trader with Merrill Lynch, Kidder Peabody and Paine Webber. He specialized in corporate cash management and his clientele included many Fortune 100 companies and institutional money managers. In 1993, he formed III-D Capital LLC to assist early staged technology companies developing business plans and securing venture capital financing. Today, III-D Capital is involved in various consulting and finance activities for mining companies Trey organizes site visits for analysts and fund managers through DD Tours LLC where he is President. He consults with FINRA and other regulatory agencies on a pro-bono basis.

Disclosures:
1. This report has been written for informational purposes only and strictly reflects the opinion of the analyst on the date of publication. Opinions may change at any time without notice. No earnings projections or target prices are intended or implied. All conclusions are drawn from information provided by the company which the analyst has made a “best efforts” attempt to verify and confirm, but its accuracy and completeness is not guaranteed. While this report has not necessarily been written in accordance with current SEC regulations and the Standards of Practice developed by the Chartered Financial Analyst Institute (CFAI), the opinions herein are believed to be consistent, reasonable and supportable.
2. The research analyst principally responsible for preparing this report was Trey Wasser, President of Pilot Point Partners, LLC.
3. Pilot Point Partners LLC, its affiliates and family may have positions and effect transactions in the securities or options of the issuers reported herein.
4. Pilot Point Partners LLC, its affiliates and family have received no direct compensation for this research report.
5. Mr. Wasser is a Principal of DD Tours LLC and may be involved in arranging site tours of a company’s properties and may receive compensation based upon various factors involved with these tours.
6. Mr. Wasser is a Principal of III-D Capital and may have other agreements, including finders fee agreements with companies, mentioned in this report, regarding potential joint ventures and/or property sales and may receive compensation based upon various factors involved with these agreements.
7. The research provided herein should not be considered a complete analysis of every material fact regarding the companies, industries or securities named above.
8. This report was prepared exclusively for the benefit of institutional investors and Pilot Point Partners may receive compensation directly or in soft dollar arrangements.
9.Additional information and disclosures on the subject companies is available upon request.
10. As of the date of this report, Pilot Point Partners LLC, its affiliates or family hold positions in CGLD, FVI and ER. They do not hold any positions in the common stock of any other companies mentioned in this report.
11. As of the date of this report, DD Tours has been compensated by CGLD for analyst tours within the past 12 months.
12. As of the date of this report, III-D Capital has no finders fee agreements with any companies mentioned in this report.

Aristotle’s Qualities of a Good Money

About 2000 years ago Aristotle defined the characteristics of a good form of money. They were as follows:

1.) It must be durable. Meaning it must stand the test of time and the elements. Money is a medium of exchange and a store of wealth so whatever form it takes, it must be able to handle the wear and tear of constant trading and transactions.

2.) It must be portable. Meaning it should be practical in the sense that it holds a high amount of ‘worth’ relative to it’s weight and size. In other words, it’s “worth” must be very dense. Imagine if money was in the form of lead bricks, these bricks would be very dense, but it would be a nightmare and near impossible to constantly exchange large amounts. And you can forget about carrying them around in your pockets.

3.) It must be divisible and consistent. Meaning it should be relatively easy to separate and distribute in smaller forms without affecting it’s fundamental characteristics. This concept also works in reverse in that it should be relatively easy to re-combine several divided pieces of the money into a larger, single piece. This makes houses and paintings and cars unpractical as forms of money because taking them apart would affect their fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:

“(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”

4.) It must have intrinsic value. This characteristic carries a bit of a subjective quality in that everyone views the world through a different lens and what I view as valuable may not necessarily be valuable to my neighbor, but for the sake of argument let’s just say that there is a consensus of value given to a certain material. The basic understanding behind intrinsic value is that the material carries ‘worth’ in and of itself. It does not derive it’s value from anything else. It just sits there and is valuable. This is why paper currencies with no backing will not stand the test of time. Paper currencies only derive their “value” from what is known as legal tender laws, which are in essence a threat of legal prosecution, and or force, if they are not accepted as money for payment.

This fourth point brings up the point of scarcity, which is in essence a matter of intrinsic value. Paper currencies in circulation today, such as the dollar, euro, yen, swiss francs, zimbabwe dollars, etc… they are all now purely fiat instruments. (by fiat, I mean that their use is declared by decree and usually by threat of force. Definition of fiat.) The governments that sponsor them have essentially unlimited power in their ability to create new supplies. Because of technology, it is now simply a matter of typing something into a computer and the amounts are instantly credited somewhere. So in theory the supply of dollars for instance is infinite, and it seems like lately the wizards in Washington are trying to see whether this theoretical limit can be reached. Take Zimbabwe as a practical real world example. It now takes trillions of Zimbabwe dollars to buy a roll of toilet paper.

Not a good form of money:

Not a good form of money:

A good form of money:

Do me a favor and think about it,
-Pip

Total Notional Value Of Derivatives Outstanding Surpasses One Quadrillion

Total Notional Value Of Derivatives Outstanding Surpasses One Quadrillion

Author: Jim Sinclair

Dear CIGAs,
The notional value of all outstanding derivatives now totals approximately $1.144 QUADRILLION.
This appears to be Bank of International Settlement Spin to announce the largest gain in derivatives outstanding since they started to report. As of the last report it appeared that both listed and OTC derivatives was under $600 trillion. Now listed credit derivatives alone stood at $548 Trillion. The OTC derivatives are shown as $596 trillion notional value, as of December 2007. One can only imagine what number they are at now.
Well we hit a QUADRILLION. We have more than $1000 trillion dollars in all derivatives outstanding. That is simply NUTS because notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. $548 trillion plus $596 trillion means $1.144 quadrillion.
It would be an interesting piece of research to see what the breakdown is of listed derivatives according to exchange to see if it adds up to the reported number. Spin is now everywhere.
This means that no OTC derivative house can be allowed to go broke. This means that whatever funds are required to rescue failing international investment banks, banks and financial entities will be provided.
Keep this economic law in mind. Monetary inflation proceeds price inflation and is its primary cause in economic history from Rome to present.
Nothing can stop the juggernaut of price inflation heading towards every nation like a runaway freight train down a mountain.
Gold is going to at least $1650. I am probably way too low with that estimate.
The US dollar will trade down to at least .5200 as measured by the USDX.
Gold is the easiest market to trade for the aggressive investor. Sell 1/3 when the market looks like a Rhino Horn which you will see with your French Curves at the point of the rollover.
Buy 1/3 back when the price of gold looks like a fishing line hanging off a fishing rod. Your maximum power down trend line will give you this.

Exchange Traded Derivatives Increased 30%, BIS Says (Update1)
By Liz Capo McCormick
June 9 (Bloomberg) — Trading in derivatives, led by short- term interest-rate futures, climbed 30 percent to a record $692 trillion in the first quarter, signaling a possible easing of tensions in the money markets, the Bank for International Settlements said.
The value of short-term interest-rate futures traded on exchanges rose to $548 trillion during the three months ended March 31, a gain of 32 percent over the same period last year, the Basel, Switzerland-based BIS said today. The contracts are designed to speculate on, or hedge against, moves in borrowing rates. The figures are based on the notional amounts underlying the agreements.
The increased trading “suggests that liquidity conditions in the term money markets might have recovered to some extent after the stressful 2007 year-end,” analysts Naohiko Baba, Patrick McGuire and Goetz von Peter wrote in the BIS’s quarterly review.
The gains were concentrated in derivatives denominated in U.S. dollars and euros, which had undergone a “significant retreat” in the prior quarter, they wrote. Banks were still pressed for cash, according to another part of the report.
A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events or the price of underlying assets such as debt, equities and commodities. Derivatives include futures, which are agreements to buy or sell assets at a set date and price, and options, which are the right but not the obligation to do so.
Eurodollar Deposits
Turnover in futures and options on three-month Eurodollar deposit rates “picked up sharply” in the period, extending a rise from the previous quarter, said the BIS, a global organization formed in 1930 that monitors financial markets and serves as a bank for central banks.
Eurodollar futures are priced at expiration to the three- month London interbank offered rate, or Libor, for U.S. dollars. Turnover in futures and options on the federal-funds rate fell in the quarter.
The increase in exchange-traded derivative trading in the first quarter erased a 21 percent slide in the previous period, the biggest drop in at least 14 years. Trading had declined as banks hesitated to lend to each other amid mounting losses on securities linked to U.S. subprime mortgages.
Even as conditions in the money market improved in the first quarter, early signs in the current quarter show that banks were still pressed for cash, BIS analysts Ingo Fender and Peter Hordahl wrote in a separate section of the report.
`Extreme Stress’
“Interbank money markets continued to show clear signs of extreme stress from March to May,” they wrote. “Spreads between Libor rates and corresponding overnight indexed swap (OIS) rates, due to counterparty credit risk as well as liquidity concerns, were generally at least as high at the end of May as three months earlier.”
This appears to imply there were expectations that interbank strains “were likely to remain severe well into the future,” Fender and Hordahl wrote.
The difference, or spread, between the three-month dollar London interbank offered rate and the overnight index swap rate, known as Libor-OIS, is 67 basis points today. The spread was 73 basis points on March 31 and peaked last year at 106 basis points in December. The spread averaged 11 basis points for the 10 years prior to August, when the global credit crunch began.
Dollar Swaps
Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate over the life of the swap. For U.S. dollar swaps, the floating rate is the daily effective federal funds rate.
Trading in stock index futures and options fell 2.7 percent to $73 trillion in the fourth quarter, compared with $75 trillion in the prior quarter, according to BIS analysts Baba, McGuire and von Peter. Trading rose 22 percent versus the same period a year earlier. The Standard & Poor’s 500 index declined 9.9 percent in the three months to March 31. The Dow Jones Stoxx 600 Index in Europe dropped 16 percent during the same period.
Foreign exchange futures and options volumes advanced in the first quarter, led by trading in the euro, yen and Swiss franc derivatives, the BIS said. These increases offset retreats in currencies that included the Canadian dollar and the U.K. pound.
Trading in currency futures and options rose to $6.7 trillion, a jump of 11.7 percent from fourth-quarter 2007 and a gain of 32 percent from the same period last year, the BIS said.
Currency Volatility
Volatility implied by options among the seven most-traded currencies increased 25 percent in the first quarter, matching the rise in the previous quarter, a JPMorgan Chase & Co. index shows.
Global trading in commodity derivatives grew by 52 percent to 489 million contracts in the first quarter from the year-ago period. The BIS said notional figures weren’t available. Agricultural and energy products led the climb, it said. Commodity trading data is not included in the BIS’s aggregate derivative figures.
Trading in derivatives not listed on exchanges increased during the second half of 2007, led by growth in the credit segment “due possibly to heightened demand for hedging credit exposure,” the BIS said.
The notional value of all outstanding over-the-counter derivatives rose 15 percent in the second half to $596 trillion, following a 24 percent gain in the first half of the year, the BIS said.
The gross market value of credit default swaps, which measures the cost of replacing all existing contracts, almost tripled to $2 trillion in the second half of 2007, compared with a rise of 53 percent in the first half, the BIS said.
Credit-default swaps, which make up the majority of credit derivatives, are financial instruments investors use to speculate on the ability of companies to repay debt or hedge against the risk they won’t.
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